USD 2.8 BN DEAL - Melrose Ind PLC MRO Proposed recommended acquisition of Nortek, Inc
Melrose Industries PLC
Proposed recommended acquisition of Nortek, Inc. and fully underwritten £1,655 million rights issue
Today the Board of Melrose Industries PLC ("Melrose" or the "Company") announces that it has reached agreement with Nortek, Inc. ("Nortek") on the terms of a recommended proposal for Melrose to acquire, for cash, the entire issued ordinary share capital of Nortek (the "Nortek Shares") ("the Acquisition").
The Acquisition will be implemented principally by way of a cash tender offer to Nortek Shareholders by MergerCo, a wholly owned subsidiary of Melrose, followed by a merger of MergerCo with and into Nortek. The offer price of $86 per Nortek Share, net, in cash and without interest, values the entire issued share capital of Nortek at $1,436 million (£1,101 million(1)) with an enterprise value of $2,810 million (£2,154 million(1)). The offer price represents a premium of approximately 37.6% to the closing price of a Nortek Share on the Latest Practicable Date and approximately 81.3% to the average price of a Nortek Share in the six month period ending on the Latest Practicable Date. The Nortek Board intends to recommend that holders of Nortek Shares tender their Nortek Shares to MergerCo pursuant to the Tender Offer. In connection with the Acquisition, certain stockholders of Nortek have entered into Tender and Support Agreements which govern the conditions upon which such stockholders shall tender their Nortek Shares pursuant to the Tender Offer and obliging such stockholders to support the Tender Offer and the Merger. Such Tender and Support Agreements have been entered into by Melrose, MergerCo and each of Ares Management, Gates Capital Management and Anchorage Capital (who together own Nortek Shares amounting in aggregate to approximately 68.7% of the total share capital of Nortek as at the Latest Practicable Date).
Melrose proposes to finance the Acquisition, related expenses and the repayment of part of the existing debt of Nortek from the net proceeds of a fully underwritten rights issue of 12 New Melrose Shares at 95 pence for each 1 Existing Melrose Share, raising approximately £1,611 million (net of commissions and expenses). The balance of the debt repayment will be funded through new debt of approximately $780 million (£598 million(1)). Melrose has recently undertaken pre-marketing meetings with a number of its institutional shareholders who Melrose believes have all been very supportive of the Acquisition.
Nortek is a leading diversified global manufacturer of innovative air management, security, home automation and ergonomic and productivity solutions. Nortek is a corporation organised under the laws of the State of Delaware. Nortek's common stock trades on the NASDAQ Global Market under the symbol "NTK". For the 12 months ended 31 December 2015, Nortek reported revenue and headline(2) operating profit of $2,526.1 m and $220.1 m respectively, with North America representing 90% of 2015 revenue.
The Acquisition represents a significant opportunity for Melrose to continue to execute its strategy of acquiring specialised industrial businesses and maximising the value inherent in those businesses. Based on performance to date, Melrose has consistently identified attractive assets, enacted operational improvements and transacted at attractive valuation levels and points in the cycle. The Acquisition represents a significant opportunity for Melrose to execute its strategy of "buy, improve, sell".
The Melrose Board believes that, through its strong track record and experience, it can support and assist Nortek to improve Nortek's financial performance and to grow the Nortek businesses to their fullest potential. The Directors believe that the proposed Acquisition of Nortek fits well with Melrose's strategy and presents an excellent opportunity for Melrose and its shareholders, not least for the reasons listed below:
a. Industry leading air management platform
Nortek offers an industry leading air management platform with a comprehensive set of heating, ventilation and air conditioning ("HVAC") and home appliance products, which represented 64% of Nortek's sales during 2015, serving a variety of end markets, including repair, remodelling and new construction, in both domestic and foreign markets.
b. Growing security and ergonomic solutions business
Nortek's Security and Control ("SCS"), Ergonomic and Productivity Solutions ("ERG") and Audio, Video and Control ("AVC") segments, which together represented 36% of Nortek's sales during 2015, offer a diverse set of security and home automation, access control, residential audio visual, home integration and control, power and energy management and ergonomic mounting and mobility solutions for various end markets.
c. Opportunities for increased investment
Melrose has identified opportunities to improve the operational quality of Nortek's businesses, including increased investment in Nortek's manufacturing facilities, product innovation, potential further complementary acquisitions, supply chain efficiencies and measures to drive market penetration.
d. Market dynamics
Nortek is well placed to benefit from a helpful market backdrop with key US economic indicators pointing to continued momentum in construction.
e. Diverse end market exposure and product offering, with the opportunity for improvement
The mix of Nortek's end market exposure provides for a diverse revenue stream. The current portfolio of multiple products across Nortek's six segments can benefit from improved focus on those products with opportunities for higher margins.
f. Significant restructuring projects undertaken
With restructuring activities initiated by Nortek across each division now largely completed, Nortek is better placed to benefit from momentum in the market and to deliver significant growth in future.
g. Further improvement available
Melrose management have identified certain further opportunities which are expected to drive improvements, including supply chain and IT systems improvements, and full utilisation of Nortek's new manufacturing facility in Mexico.
h. Changed capital structure and costs savings
Melrose aims to reduce Nortek's cost of debt to free up significant cash flow. In addition, Nortek incurs a large amount of costs associated with maintaining its NASDAQ listing which will be removed following the cancellation of its listing.
The Melrose Board expects that the Acquisition will be significantly accretive to headline(2) earnings per share in the first full financial year of ownership (2017) and thereafter(3).
Pursuant to Listing Rule 5.6.12 G (2) of the FCA, Melrose confirms that Nortek has complied with the disclosure requirements applicable on the NASDAQ Stock Market and that information disclosed pursuant to those requirements can be obtained at www.nortek.com and there are no material differences between those disclosure requirements and the disclosure requirements under the Disclosure Requirements and Transparency Rules of the FCA.
Due to its size, the Acquisition is a reverse takeover and constitutes a class 1 transaction for Melrose under the Listing Rules. As such, Melrose is seeking the approval of Melrose Shareholders for the Acquisition. Melrose Shareholders will also be asked to approve the allotment of New Melrose Shares to be issued pursuant to the Rights Issue and to grant certain authorities with respect to the Enlarged Share Capital following the completion of the Rights Issue.
As the Acquisition constitutes a reverse takeover under the Listing Rules, upon Completion, the listing of Melrose Shares on the premium segment of the Official List will be cancelled. The Melrose Shares will not be eligible for re-admission to the premium segment of the Official List, as the latest balance sheet date for which audited consolidated historical financial information for Nortek can be provided is more than six months prior to the date of the Prospectus. Therefore, further application will be made to the UKLA for the Melrose Shares to be re-admitted to the standard segment of the Official List. Should Completion not occur, subject to shareholder approval and in compliance with UKLA requirements, the listing of the Melrose Shares will nevertheless be transferred from the premium segment to the standard segment of the Official List. Following Re-admission with, or transfer to, a Standard Listing, the Directors intend to seek a Premium Listing for Melrose as soon as reasonably practicable, subject to meeting the eligibility criteria contained in Chapter 6 of the Listing Rules.
Melrose is seeking the approval of Melrose Shareholders for the cancellation of the listing of the Melrose Shares on the premium segment of the Official List and the re-admission or transfer of the Melrose Shares to the standard segment of the Official List and to trading on the London Stock Exchange's main market for listed securities.
Accordingly, the Melrose General Meeting has been convened at the offices of Investec Bank plc, 2 Gresham Street, London EC2V 7QP at 11.00 a.m. on 25 July 2016.
The Rights Issue is not conditional upon Completion of the Acquisition. In the unlikely event that the Rights Issue proceeds but Completion does not take place, the Board of Melrose currently intends to invest the net proceeds of the Rights Issue on a short-term basis while the Board of Melrose evaluates other acquisition opportunities and, if no acquisitions can be found on acceptable terms, the Board of Melrose will consider how best to return surplus capital to Melrose Shareholders in a timely manner. Such return could carry fiscal costs for certain Melrose Shareholders, will have costs for Melrose and would be subject to applicable securities laws.
The Merger Agreement provides that, should Nortek, after the date of the Merger Agreement but on or prior to the Window Shop Deadline (being 11.59 p.m. (New York time) on 6 August 2016), receive a Superior Proposal (being unsolicited and bona fide and in compliance with a non-solicit covenant) then, subject to, among other things, the ability of Melrose to match and amend its offer and the payment of a fee of $50.0 million by Nortek, Nortek may terminate the Merger Agreement. In order to minimise the risk of Melrose raising funds pursuant to the Rights Issue but the Acquisition not completing, the Provisional Allotment Letters will only be despatched to Qualifying Non-CREST Shareholders, the Nil Paid Rights will only be credited to the CREST stock accounts of Qualifying CREST Shareholders and Admission will only occur following the expiry of the Window Shop Deadline without the acceptance by Nortek of a Superior Proposal.
Copies of the Prospectus and Circular will be made available on Melrose's website, www.melroseplc.net, and will be submitted to the National Storage Mechanism, where it will be available for inspection at www.hemscott.com/nsm.do.
The Board's expectations for Melrose's full year performance remain unchanged from that detailed in the Company's trading statement on 11 May 2016.
Melrose's Chief Executive, Simon Peckham, said:
"Nortek is a high quality manufacturing business with over 90% of its turnover in North America and product penetration into 80% of US households. It serves attractive end markets at good points in their cycle, with strong brands and market positions. Nonetheless there remains solid potential for further improvement under Melrose's guidance. Our ability to apply our industrial experience and investment expertise, as well as to liberate Nortek from its current capital structure will transform the prospects of the business. Our team is excited about getting to work to achieve these results as soon as possible. "
Melrose's Chairman, Christopher Miller, added:
"This represents the next chapter in the Melrose story. Since formation we have created and returned over £2.8 billion of value to our shareholders and we believe that Nortek presents an excellent opportunity to build substantially on that track record. As a UK-listed business we are gratified by the vote of confidence - from our shareholders and lending institutions - in assembling the equity and debt package within such a short period of time. I have no doubt that we will be able to justify their confidence as we help reinvigorate this fine business."