Melrose chief executive Simon Peckham – Geoff Pugh /Telegraph
The buyout specialist Melrose is putting another £100m into engineer GKN’s pension pot, fulfilling a key takeover pledge following a major disposal.
The FTSE 100 company is in line to make $ 3.6bn (£2.6bn) by selling its air conditioning business Nortek Air Management to US specialist Madison Industries, it said on Monday.
The deal leaves it with cash to spend on GKN pensions, dividends and debt repayments and Melrose is also expected to look for a major new purchase to strengthen its portfolio.
The deal is “positive for the shareholders for a number of reasons – crystallising value, a now simplified, faster-growing portfolio and further validation of the Melrose model”, said analysts at JP Morgan.
Founded in 2003 by David Roper and Christopher Miller, Melrose’s operating model involves buying lagging manufacturing businesses and running them for three to five years before selling them on at a profit, under the mantra ‘buy, improve, sell”.
The strategy has proved lucrative, with total shareholder returns outperforming the FTSE 100 roughly 14 times, according to its most recent annual report. In 2017 its four top directors shared £160m worth of shares from a long-term incentive bonus payout.
Melrose said it had doubled Nortek’s margins from 8.6pc to 15.3pc and more than doubled profits to £188m. It has also helped it develop technology to cool air at data centres, cutting water and energy usage.
Simon Peckham, the chief executive, said: “We are continuing to show that it is possible to make great returns for shareholders, while looking after pensioners and answering the environmental demands of the modern world.”
JP Morgan analysts predicted that the £2.6bn Nortek sale could lead to a 10p a share payout for Melrose shareholders. Its shares have struggled during the pandemic, down more than 30pc since last February. They fell before closing up 0.7pc at 180.1p.
Melrose clinched its biggest deal in 2018 when it paid £8bn for 269-year-old aerospace and engineering stalwart GKN, following an acrimonious hostile takeover battle in which Melrose directors were forced to answer MPs’ questions about jobs and investment under their management.
During the battle, Melrose pledged to contribute up to £1bn into GKN’s indebted pension schemes during its ownership, including doubling annual contributions to £60m and paying in a chunk from sales of other parts of the business.
The £100m announced on Monday means the funding deficit in GKN’s pension pot will have been cut from £1bn to £200m and Melrose said it would “continue funding the schemes at a high level to reduce that further”.
Melrose has paid in £400m overall, including £150m when it took over GKN, while the rising stock market has also helped reduced the deficit. On an accounting basis, the fund was now in surplus, Melrose said.
It comes two months after Mr Peckham defended plans to shut down GKN’s car parts plant in Erdington, Birmingham, with the loss of 500 jobs.
He argued that serious measures were needed to help the troubled business that lost a quarter of its market between 2016 and 2019 and was facing further losses due to electrification. Jaguar Land Rover, a major customer, is planning to launch electric versions of all its cars by 2030.
Nortek Air Management accounts for almost three quarters of the Nortek business for which Melrose paid $ 2.8bn in 2016. After taking into account $ 1bn cash received at the operating level, Melrose said shareholders have doubled their money.
Melrose expects to sell the rest of Nortek later this year, which could potentially fetch a further $ 1bn. It is left with GKN as well as standing desk maker Ergotron and power generation specialist Brush.
Analysts at JP Morgan noted a greater proportion of Melrose’s sales were now in the “improve” phase of Melrose’s plan, which should boost profits.
Mr Peckham said last month that GKN will be looking to make another major acquisition possibly by the end of the year, despite the ongoing uncertainty from the pandemic. “We are an acquisitive vehicle,” he told the Financial Times.