Elster has agreed to due diligence, and the backing of the Essen, Germany-incorporated company’s board, as well as largest shareholder CVC Capital Partners Ltd., is required for any firm offer, the London-based company said. The $20.5-a-share proposal is 25 percent higher than Elster’s close on June 15.
The pursuit of Elster follows Melrose’s unsuccessful battle to acquire Charter International Plc, bought by Maryland-based Colfax Corp. (CFX) for $2.7 billion six months ago. Managed by former Wassall Plc executives, Melrose targets under-performing engineering and manufacturing companies and has investments spanning plastic components, waste recycling as well as building products.
“This would be Melrose’s ideal size,” Richard Paige, an analyst at Barclays, said in a note. “Elster has a strong market position which we expect to rise.”
Paige highlighted more assessment is needed to ascertain whether Elster is the type of management turnaround opportunity that Melrose specializes in, with the multiples not appearing “cheap at first glance” and a deal structure imposing more debt on the combined entity.
Potential Battle Ground
Melrose shares rose 0.4 percent to 384.1 pence in London trading as of 8:59 a.m.
Elster, which has deployed more than 200 million meters, generated revenue of $1.9 billion in 2011. Melrose’s offer is equal to 8.42 times Elster’s earnings before interest, taxes, depreciation and amortization, compared with a median multiple of 12.28 times for electronic instrument deals in western Europe over the past six years, according to data compiled by Bloomberg.
Elster, with a market value of $1.85 billion, competes with Itron Inc. (ITRI), Landis + Gyr AG of Switzerland, and Sensus USA Inc. Techem AG, a German reader of utility meters, is owned by Macquarie Bank Ltd.
The asset could be of interest to Siemens AG (SIE), ABB Ltd. (ABBN) as well as private equity firms, Barclays analyst Amir Rozwadowski wrote in a recent note. Global engineers are seeking expansion in smart-grid technology, which helps regulate the amount of power in a grid relative to demand, as nations upgrade equipment. Itron, in an April 26, highlighted China as an “excellent” market opportunity for water and heat metering.
In the midst of the takeover battle surrounding Charter, Melrose approached shareholders of Europe’s biggest welding- equipment maker about scuppering Colfax’s bid, the Financial Times reported Sept. 24. While Charter’s board backed the Colfax offer, its two biggest shareholders, Aviva Plc (AV/) and Schroders Plc (SDR), saw Melrose as the best manager for the company’s assets, the newspaper reported.
“Melrose will only proceed with the transaction if it meets Melrose’s acquisition criteria, including the terms on which financing for the transaction can be raised,” the company said in the statement. “This will include, but not be limited to, the Melrose share price at the time of announcement.”
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