Turnaround wizard targets GKN
INVESTOR MELROSE’S TEAM HAS QUIETLY SOLD FOUR BIG ENGINEERING FIRMS WITH RETURNS OF £4B
uy, improve and sell — it’s the mantra the men who founded and run listed turnaround investor Melrose use to describe their work.
The company has operated with little fanfare since floating in 2003 as it carries out its mission of identifying underperforming engineering businesses, making them better and selling them at a premium, with the proceeds handed to investors. Since its launch, the four acquisitions Melrose has made — and almost entirely sold — have allowed it to return more than £4 billion (Dh20.9 billion) to investors.
“There’s an almost reverential feeling about Melrose,” says one analyst, referring to the four key figures who control the FTSE 250 business. “They say what they are going to do and just go out and do it.” But Melrose’s low profile was ended dramatically just over a week ago when it set its sights on its biggest quarry yet — the historic blue-chip aerospace and automobile parts manufacturer GKN.
Melrose’s audacious £7.4 billion approach was outed by GKN, which rejected it as too cheap. The company also revealed an alternative plan to split in two: a supplier of aerospace parts; and a maker of car components. The dramatic exchange has triggered the biggest hostile takeover battle since Kraft’s swoop on Cadbury almost a decade ago. Yet, it is not the way Melrose likes to work, according to chief executive Simon Peckham.
“We’d approached them privately, we didn’t want a frenzy,” he says, speaking after the offer went hostile. “And it’s also a bizarre piece of M&A: normally the bidder says ‘we can do so and so’ and the company says ‘no you can’t’. But in this case they’re agreeing with us.” Staying true to its mantra, which comes with a three to five-year timeline, Melrose wants to slash GKN management, deliver a “fundamental” culture change, sell the bits it thinks don’t fit and turn the firm — which has struggled to hit its margin targets — into a “world-leading business”.
Peckham adds: “We’ve no preconceived ideas but GKN needs the catharsis of a change of control.” GKN has hit back, rubbishing Melrose’s claim that its offer was a third better than GKN’s share price as a “fake premium”, and accusing them of effectively expecting shareholders to pay themselves because some of the funding will come from the company’s own balance sheet. A senior industry source also questioned Melrose’s ability to deal with GKN’s biggest customers, warning it “will get eaten alive by the likes of Boeing”.
Generating profit
A Melrose-driven catharsis has worked for others. Its first target, McKechnie and Dynacast, was bought for £429 million in 2005, and sold for a combined £805 million between 2007 and 2011, with a further £100 million of profit generated under Melrose’s ownership. Deal two came in 2008 when FKI was acquired for almost £1 billion, and by 2014 Melrose had sold about half of the businesses it contained for between 2.5 and 3 times the outlay. One FKI company remains a problem though, the generator maker Brush. The downturn caused by the oil price crash isn’t conducive to selling, a function of what Peckham has called “dreadful, horrible, awful” markets. The third deal Melrose made was Elster, for which it paid £1.8 billion in 2012.
The electric meter maker was sold to Honeywell for £3.3 billion three years later. Next came US heating and security group Nortek, which Melrose paid £2.2 billion for in 2016 and still owns. But where did this Melrose magic that apparently allows it to take on the sick, nurse them back to health and then sell them come from? The answer is simple — Lord James Hanson, whose Hanson business was one of the most successful corporate raiders in UK history.
Melrose is the brainchild of Chris “Jock” Miller, who is still the chairman, and who learnt his craft working for Lord Hanson. Miller later became one of the driving forces behind miniconglomerate Wassall, a reiteration of Hanson, along with David Roper, a former Warburg banker and Melrose’s executive vice-chairman. They sold Wassall to US private equity house KKR for £627 million in 2000 and three years later, after getting bored improving their golf, joined up with Peckham to create Melrose, a listed version of what they had done at Wassall. An associate described Miller and Roper as “skilled City operators who know who to talk to and what to do”. Peckham, he added, “hasn’t got much time for the City. He just wants to run companies, not give results presentations”.
Melrose finance director Geoff Martin, who joined in 2005, was also described as “fully on top of the numbers, better than many FDs”. Together, their recipe for improving companies is simple. “We simplify, decentralise management, and incentivise people running a business at a divisional level,” says Peckham. “Those closest to the coal face know best how to run it. We bring discipline to businesses.” They practice what they preach: despite recent acquisition Nortek having about 11,000 staff, at Melrose’s Mayfair headquarters there are only about 40 people. Job losses lower down also come. One long-term staffer at Brush said: “When they took over there were 1,200 people and we’re down to 600.” Decentralisation also rings true for the Brush worker. “We never see anyone from Melrose, it’s left to managers who they bring in and all hands off. But it feels like they are pretty hard-nosed. We’ve had five managing directors since they bought us: that tells you something.”
Peckham denies Melrose is essentially private equity by another name. “I can see why some people see parallel — we’re not a charitable act. But we have serious skin in the game [the four top bosses own almost 4 per cent of Melrose] and we invest to make improvements.”
Roper echoes the sentiment: “We put up to a third of the acquisition price back into the businesses to make them better.” Peckham adds: “Unlike private equity, we don’t take companies off the market. We keep them public — private equity cashes investors out,” he says. However, there are private equity-style returns for the people at top. A £160 million bonus shared between Miller, Roper, Peckham and Martin last year raised eyebrows but Peckham points out the scheme was backed by investors “and we paid tax on it”. Others are sceptical that the Melrose-model can be replicated at GKN. “Brush has proved challenging for them and the Melrose wizards haven’t been able to cast their spell on it,” said one analyst. “GKN is even more complex than that.” Investors face a call — do they prefer the devil they know in GKN, or some Melrose magic?