Melrose To Buy Elster For $2.3 Billion
06/29/2012| 05:45am US/Eastern
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LONDON--British engineering investment group Melrose PLC (>> Melrose plc) said Friday it had agreed to buy Elster Group SE (ELT), a maker of utility meters, for $2.3 billion, in its first big deal in several years.
Melrose, which buys underperforming manufacturing or engineering businesses and improves their margins before selling them off, said it had agreed to pay $20.50 for each American depository share in a tender offer that will start on or around July 6. The tender offer will be funded in part by new debt and also through a GBP1.2 billion rights issue that Melrose said was fully underwritten.
The rights issue will offer two new Melrose shares for each existing share at 142 pence a share.
Elster, which is based in Germany but has a listing in New York, makes water, electricity and gas utility-meter appliances which are sold in 130 countries. It is the second-largest utility maker by market share, said Melrose's executive vice chairman, David Roper.
Buyout group CVC Capital Partners owns just over 60% of Elster's equity, with the remaining equity listed on the New York stock exchange.
Melrose said the offer price represented a 48.6% premium to the value of an Elster ADS on June 11, the last day before press speculation appeared that CVC was considering disposing of its holding.
Melrose operates like a buyout firm in that it buys businesses that require a turnaround, but it doesn't use debt to finance the acquisitions. It typically holds businesses for a three to five year window before selling them on.
Melrose's Mr. Roper told Dow Jones Newswires Friday that Melrose planned to raise Elster's earnings before interest, taxes, depreciation and amortisation margin by around 2%, in part through accelerating an existing restructuring plan the company had recently put in place.
"We believe that Elster is an excellent fit with the Melrose acquisition criteria," Simon Peckham, Melrose's chief executive, said in a statement. "Elster is a high-quality business with strong end markets and the potential for significant development and improvement under Melrose management."
Melrose said it had irrevocable undertakings from 62.17% of its shareholders to pursue the deal.
Shares in Melrose rose 3% on news of the acquisition, initially indicating that shareholders broadly liked the deal and were supportive of the planned rights issue, although the transaction is expected to be dilutive to earnings per share in the first full financial year of ownership.
However by mid-morning London time, shares were trading down by 1.6% at 362 pence, underperforming a higher London market.
Mr. Roper said the deal was expected to be accretive to earnings by the end of 2014.
Shareholders will be asked to approve the deal at a meeting July 16. The rights issue will begin in early August.
-Write to Jessica Hodgson at jessica.hodgson@dowjones.com
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