Melrose Buys Fan Maker in First U.K. Purchase Since Brexit

  • Melrose hedged $2.8 billion deal just prior to announcement
  • Shareholders offered a 38% premium over Nortek’s closing price

The weakest pound in 31 years hasn’t totally buried U.K. companies’ pursuit of acquisitions abroad.  

In the first post-Brexit transaction involving a U.K. acquirer, Melrose Industries Plc agreed to buy U.S. ventilation-fan maker Nortek Inc. for $2.8 billion, betting that dollar-profits from the business and operational improvements will make up for a deal made more expensive by the pound’s slump.

Melrose, which hedged the U.K. currency just before announcing the transaction, said Nortek dollars will be converted back to sterling, while there’s plenty of scope for expansion, Chief Financial Officer Geoff Martin said in an interview Wednesday.

Shares of Melrose, which plans to raise about 1.6 billion pounds ($2 billion) in a rights offering, jumped 33 percent to 543.50 pence at 1:45 p.m. in London. Nortek rose 4.1 percent to $62.49.

The British turnaround specialist was in need of a deal after selling electric metering maker Elster to Honeywell International Inc. a year ago for $5.1 billion. Having returned 2.8 billion pounds to investors, Melrose was able to count on their support to buy Nortek amid global financial turmoil following the U.K.’s vote to leave the European Union, Martin said.

“If you keep giving shareholders a 30 percent internal rate of return, they’ll keep giving you money to do more, and that’s exactly what they’ve done here,” the CFO said.

Melrose is building a new portfolio after selling assets including Elster, Dynacast and McKechnie Group. Before the Nortek deal, Melrose’s one remaining investment was Brush, once part of FKI Plc that Melrose bought for 1 billion pounds in 2008.

Hungry for Deal

“We’ve been smaller than we like to be for a little while, looking for a deal,” Martin said by phone. While the Birmingham, England-based company’s focus is on the completing the Nortek purchase, “there will be future deals,” he said.

Shareholders of Nortek will receive $86 a share in cash under the terms of the reverse takeover to be carried out by a specially-created subsidiary, Melrose said in a statement earlier on Wednesday. The price is 38 percent above Tuesday’s closing level for Providence, Rhode Island-based Nortek, implying an equity value of $1.4 billion.

Construction Rebound

Melrose is betting a strengthening of the U.S. economy will boost the construction sector, helping Nortek’s sales of kitchen range hoods, air conditioning and home-security systems. In keeping with its “buy, improve, sell” strategy for investments focused on industrial companies, Melrose said it’s identified opportunities to enhance the supply chain and information technology systems at Nortek, lighten the debt burden as well as making more use of a new plant in Mexico.

Nortek shareholders holding about 68.7 percent of the company are backing the deal, according to the statement. Closing the transaction depends on Melrose getting more than half of outstanding shares in Nortek.

Nomura International Plc is the lead adviser on the deal. JP Morgan Cazenove and Bank of America Merrill Lynch are also advising Melrose, as well as coordinating the rights offering with Investec Bank Plc and Evercore International Partners LLP.

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