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Melrose Industries Plc - Proposed Disposal of Nortek Air Management

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MELROSE INDUSTRIES PLC

Proposed Disposal of Nortek Air Management for $3.625 billion

Melrose Industries PLC ("Melrose", the "Company" or the "Group") today announces that it has entered into an agreement to sell its Nortek Air Management business ("Air Management"), comprising the Nortek Global HVAC ("GHVAC") and Air Quality & Home Solutions ("AQH") segments, to Chicago-based Madison Industries for consideration of approximately £2.62 billion ($3.625 billion), payable in cash on completion, subject to certain adjustments (the "Disposal").

Key highlights of the Disposal:

  • Cash consideration of approximately £2.62 billion ($3.625 billion), subject to customary adjustments;
  • Implied sale multiple of 2.3 times 2020 revenue;
  • Implied sale multiple of 12.5 times 2020 Adjusted EBITDA;
  • Melrose intends to use part of the net proceeds to reduce debt and contribute approximately  100 million to the GKN UK defined benefit pension schemes, which means that the funding deficit will have reduced from approximately £1 billion to approximately £200 million under Melrose ownership; and
  • A portion of the net proceeds will be returned to Shareholders.

Completion of the Disposal is expected to occur in the second or third quarter of 2021 and is conditional upon, amongst other things, shareholder approval. Further details in respect of the proposed return of capital will be announced by the Company within a short period following Completion.

Justin Dowley, Chairman of Melrose, today said:

"The Disposal demonstrates the strength of the Melrose strategy.  We bought Nortek, an underperforming group, which we felt had outstanding potential in 2016 for £2.2 billion ($2.8 billion). We have seen approximately $1 billion of cash inflows from the Nortek group during our ownership, effectively giving us an in-price of $1.8 billion. The businesses being sold today for £2.62 billion ($3.625 billion) represent 73%, by revenue, of the Nortek group and the returns are excellent. Our Ergotron and Nortek Control businesses which also form part of the Nortek group remain under our ownership and will be realised at an appropriate time."

Simon Peckham, Chief Executive of Melrose, today said:

"Our strategy of 'Buy, Improve, Sell' remains the same but circumstances evolve. Our businesses are all responding to the demands of climate change, driven by customers and consumers; Air Management's StatePoint Technology® is a perfect example of this. On our watch, our Air Management executive team has created a business from scratch with exemplary environmental credentials which will make a real difference to energy and water consumption in its market.  We can now hand that technology to a high quality buyer with specialist aspirations and skills. 

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."

Successful execution of Melrose's strategy for Air Management

When acquiring Nortek, Inc. in 2016, the Melrose Board immediately removed the top layer of cost-intensive central management functions and empowered the operational and executive teams to transform their businesses from top to bottom.

Thereafter, Melrose worked with the operational teams to improve production processes, increase R&D, develop new products and build stronger customer relationships. Having identified substantial opportunities for incremental sales growth as well as the opportunity to materially improve the business's efficiency and profitability, Melrose then committed significant resources towards improving Air Management.

Melrose has achieved the following in respect of the Air Management business during its ownership:

  • In 2016 Melrose seed funded a new technology for the nascent StatePoint business, with an initial $2 million of start-up funding followed by approximately a further $75 million of investment;
  • The StatePoint Liquid Cooling technology for data centre cooling, has since added over $300 million in fully contracted future revenues with an impressive growth pipeline;
  • Almost doubled Air Management's Adjusted operating margin from approximately 8.6% to 15.3% through the implementation of operational best practices, and increased profits from £91 million to £188 million;
  • Implemented significant pricing controls, exited non-profitable businesses and reinvigorated

Air Management's salesforce to improve efficiency and drive growth; and

  • Streamlined its product portfolio, funded and accelerated new product development initiatives and realigned the business with key secular trends.

Principal terms and conditions of the Disposal

The consideration for the Disposal is based on an enterprise value of approximately $3.625 billion and is payable in cash on Completion, subject to limited customary adjustments.

Completion is conditional upon, amongst other things, customary antitrust approvals and the approval of the Shareholders at a General Meeting of Melrose Shareholders.

Melrose's strategy

The Disposal is in line with Melrose's established business model to buy good manufacturing businesses, improve their performance typically over a three to five-year investment horizon, sell a more profitable and a better cash generating asset to a new owner and return cash to Shareholders and other key stakeholders.

Melrose's focus has always been to unlock the value of underperforming but high quality manufacturing businesses through investment and to generate superior returns for its Shareholders. Since acquiring Nortek, Inc., Melrose has transformed Air Management into a streamlined, efficient business with excellent margins. Furthermore, in addition to representing a significant return for Melrose investors, the sale of Air Management allows the Company to focus on executing its improvement plans within its retained divisions, comprising the Aerospace, Automotive, Powder Metallurgy and Other Industrial segments.