British buyout and turnaround specialist Melrose Industries PLC (LSE: MRO) agreed to acquire Providence, R.I.-based heating, ventilating, and air conditioning (HVAC) systems manufacturer Nortek Inc. (NASDAQ: NTK) for $1.4 billion (£1.1 billion) in cash, with an enterprise value of $2.8 billion (£2.15 billion). The offer price of $86 per Nortek share represents a premium of 37.6% to its closing price on July 5, 2016.
Nortek, founded in 1967, is a global, diversified industrial company focusing on ventilation products, such as range hoods and bathroom fans, security and audio/video solutions, heating and cooling products, air management systems, and ergonomic and productivity solutions.
“We have watched and admired Nortek’s progress and we are convinced we can steer this fine business to achieve its full potential,” said Christopher Miller, chairman of Melrose. “We see a company full of hard-working, dedicated people who are really good at what they do. We can harness those strengths by meaningful long term investment and a vision based on our own experience in similar and relevant markets down the years. Melrose has been a highly successful custodian and builder of US businesses and we are confident that we can bring that expertise to build Nortek for the long term.”
“We are very pleased to have reached the proposed agreement with Melrose Industries, which represents a significant premium for our shareholders,” said Nortek’s president and CEO Michael J. Clarke. “We believe this partnership with Melrose will enhance Nortek’s ability to further leverage its industry-leading brands and market positions to continue driving profitable growth.
Nortek’s controlling shareholders holding a combined 69% stake in the company, including affiliates of private equity and alternative investment firms Ares Management (NYSE: ARES), Anchorage Advisor Management LLC and Gates Capital Management, Inc., have agreed to support the deal with Melrose.
The deal is expected to close by August 31, 2016 subject to customary closing conditions. Melrose said it intends to finance the acquisition by issuing £1.61 billion ($2.35 billion) in new stock.
“The deal is a bet by the British firm on the U.S. housing market, where Nortek derives much of its sales, and comes as the U.K.’s vote to leave the European Union has cast a shadow over the domestic economy and sent the value of the pound tumbling,” The Wall Street Journal commented.
The deal with Melrose is also expected to reduce the debt burden of Nortek, which emerged from Chapter 11 protection in 2010.
Barclays, Citi and RBC Capital Markets are acting as financial advisors and Weil, Gotshal & Manges LLP is acting as legal counsel to Nortek. Nomura International is acting as financial advisor and Simpson Thacher & Bartlett LLP is acting as legal counsel to Melrose.
Melrose, founded in 2003, is a London-based investment company specializing in the acquisition and performance improvement of underperforming businesses. Its strategy is to improve the businesses through a combination of investment, changed management focus, overhead reduction and gross margin expansion. Melrosre then sells the businesses and returns the proceeds to shareholders. The company’s current principal operating subsidiary is Brush Turbogenerators, the world’s largest independent manufacturer of electricity-generating equipment for the power generation, industrial, oil & gas and offshore sectors. Brush was part of FKI, which Melrose acquired in 2008. Melrose previously bought and sold diecast parts and components manufacturer Dynacast, engineering group McKechnie, and metering business Elster.