INDUSTRial buyout specialist Melrose yesterday revealed it is in talks to acquire German utility meter maker Elster Group in a deal worth $2.3 billion (£1.47bn).
If completed, the acquisition would mark the first major transaction in four years for Melrose, which targets underperforming manufacturing businesses with a view to improving them and selling them on.
Last year Melrose walked away from a potential deal to buy Charter International – parent company of Renfrew-based engineering group Howden – which was eventually bought by rival American suitor Colfax.
In a statement yesterday Elster said that Melrose could offer $20.50 per share, a 25 per cent premium to the German company’s closing price on Friday.
Melrose, which plans to finance the deal through new debt and a rights issue, said it would not go ahead without a recommendation from Elster’s board or an undertaking from its majority shareholder, Rembrandt Holdings, a division of private equity firm CVC Capital Partners.
JP Morgan Cazenove analysts expect the company to raise about $1.88bn through a rights issue.
Arden Partners analyst David Larkam said he didn’t expect funding to be an issue.
He said: “One look at the shareholder register for Melrose shows you that you could probably do it in about an hour. It will not be a problem getting finance.”
Elster, which makes meters for gas, electricity and water utilities, embarked on a cost-saving programme in the first quarter, including the closure of four major facilities and a consolidation of operations and sites.
JP Morgan Cazenove analysts said in a note: “Given Melrose’s track record of driving operational improvements we see the potential for material margin expansion over Melrose’s investment timeframe.”
Elster generated revenues of $1.9bn in 2011 and now operates in 130 countries worldwide. Over the past decade it has installed more than 200 million meters.
Melrose sold its Dynacast business, which makes die-cast metal parts, for £360m last year after steering the company through the financial crisis and overseeing a 32 per cent jump in revenues at the business in 2010.
Its last major acquisition was in 2008, when it bought crane, cable and hooks maker FKI for £478m.
It has been on the lookout for another major deal after walking away from toolmaker Charter International in the face of a higher offer from US company Colfax Group last year.
Charter had turned down two takeover approaches from Melrose before granting the firm access to its books following an improved £1.43bn conditional offer. But Charter’s board recommended a rival £1.5bn offer from US pumps and valves manufacturer Colfax.
Although Melrose completed due diligence and agreed terms with its financing banks, it said it had taken the view that the acquisition was not in shareholders’ best interests.
Last month Melrose said revenues were up 9 per cent in the first four months of the year.
Shares in the company fell 11.9p, or 3.1 per cent, to close at 370.6p yesterday. Its market value has risen by around 15 per cent over the past 12 months.