Investors in industrial buy-out specialist Melrose Industries (MRO) could be in line for a significant windfall. The group confirmed, following media speculation, plans are underway to sell its Crosby and Acco units. Despite this prospect, the shares were down 2.1% at 255.9p amid wider market weakness.
Warwickshire-based Melrose has appointed investment bank JP Morgan to assist in this process but says these talks are at an 'early stage'. Stockbroker Investec, which has a 'buy' rating on the stock and 300p price target, estimates it could return as much as 50p a share (or 19.5% of the current share price) in a special dividend if Crosby can command the $900 million price tag quoted in media reports.
Analyst Chris Dyett says this would be around double the implied value that Melrose paid for Crosby when it was picked up as part of the 2008 acquisition of industrial conglomerate FKI. According to sums from Oriel Securities, which also has a 'buy' rating with a price target of 270p, Crosby is much the larger the two business with 2013 earnings before interest and tax (EBIT) of £59.5 million compared with an estimated 2013 EBIT for Acco of £3.8 million.
Melrose buys poorly-managed manufacturing businesses which are suffering from a lack of investment. It seeks to drive operational improvements and boost cash generation. Having achieved the targeted improvements it then looks to sell - with a typical time frame from acquisition to divestment of three to five years.
The proceeds are either used to pay down debt or simply returned to shareholders. It has a good track record. Since the group's inception a decade ago broker Liberum Capital estimates the firm has created £2 billion of shareholder value. So far this year Melrose has already agreed the sale of Truth Hardware for $200 million and is in the process of selling Marelli Motori (which Investec believes could attract a price of £150 million).
Melrose is a running Shares Play of the Week, having highlighted the stock at 255.9p on 16 May.