Melrose: cool reception greets climate control sale

The pandemic threw a spanner in the works of Melrose last year. Shuttered economies hurt its largest asset GKN, a UK automotive and aerospace components group. Now the recovery is giving Melrose a boost. The industrial turnround specialist is selling climate control business Nortek Air Management to Madison Industries of the US for $3.6bn.

The Nortek sale represents a return to business as usual for Melrose whose motto is “Buy, Improve, Sell”. The final part of that trinity has increasingly hogged investor attention. Earnings tumbled and debt ratios crept higher last year. Proceeds from Nortek will go towards shoring up the company balance sheet. They will also reduce the pension scheme deficit of GKN, on which Melrose took a big risk via a £8bn takeover in 2018.

Too little cash will be returned to shareholders to thrill them. Melrose shares fell 5 per cent as a result. 

Since Melrose bought Nortek for $2.8bn in 2016, operating margins at the business have almost doubled to 15.3 per cent last year. A strong housing market has helped boost demand for home ventilation products. Nortek’s energy-efficient cooling systems are also popular with data centre operators. 

Including extracted cash and valuing the parts of Nortek not included in the deal at $1bn, the return for Melrose is more than double its initial investment.

Yet a sale price of 13 times last year’s ebitda still looks low compared with traded peers like Lennox International. Shares in the big US climate control group are 40 per cent above their pre-pandemic level. They are trading at 20 times trailing ebitda. The difficulty for Melrose is that a US stock market pumped up with stimulus money is not always enough to encourage hard-nosed trade buyers to pay top dollar.

Balance sheet repair of $1.5bn from the proceeds might get Melrose’s leverage down to a manageable 2 times forecast 2021 ebitda. Shareholders should prepare for a smaller slice of the sale proceeds than they once hoped for. There is some compensation for them in the smoother functioning of the Melrose financial machine. 

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