Melrose Industries Plc · LSE:MRO
Melrose Industries — Merger or Acquisition (July 2016)
36 slides from Melrose Industries's merger presentation, Jul 6, 2016
Slide 1: Acquisition of Nortek – an excellent opportunity
Buy Improve Sell Melrose Industries PLC Acquisition of Nortek – an excellent opportunity Investor presentation 6 July 2016
Slide 2: Disclaimer
Disclaimer IMPORTANT: YOU MUST READ THE FOLLOWING BEFORE CONTINUING. For the purposes of this notice, “presentation” shall mean the presentation document that follows, any oral briefing that accompanies it and any question and answer session that follows that briefing. By attending the meeting where
Slide 3: Contents
Contents Sections 1 Executive summary 2 Nortek – an excellent opportunity 3 Divisions 4 Transaction structure and timetable 5 Appendices Buy Improve Sell 3
Slide 4: Executive summary
Buy Improve Sell Executive summary 4
Slide 5: Executive summary
Executive summary Nortek is a US manufacturing business with leading brands in air management, security, home automation and ergonomic and productivity solutions segments Helpful end-market conditions, with attractive entry point in the cycle Nortek is a good business but is underperforming it
Slide 6: Nortek – an excellent opportunity
Buy Improve Sell Nortek – an excellent opportunity Buy Improve Sell 6
Slide 7: Clear reasons to buy
Nortek Buy Clear reasons to buy A good manufacturing business: Strong brands and market Number 1 US positions in most product areas with presence in 80% of US 1. positions homes, a good presence in US offices and in education and health centres Air management, cleaner air, security, home automation
Slide 8: How has the opportunity arisen?
Nortek Buy How has the opportunity arisen?1 Debt Five year share price $ holders 100 100 converted 90 to equity 80 2004 70 Bought by 2008 2009 60 Thomas H Lee Debt Came out of 50 Partners, a refinancing Chapter 11. 40 1967 private equity firm took Debt 2011 Company in Boston, for Listed on 30 levera
Slide 9: Strong brands and market positions
Nortek Buy Strong brands and market positions Ergonomic & Air Management Security & Home Automation Productivity Solutions (64% of 2015 sales) (22% of 2015 sales) (14% of 2015 sales) (53% of 2015 profit)1 (17% of 2015 profit)1 (30% of 2015 profit)1 Air Quality & Home Residential & Custom & Commercia
Slide 10: Good product sectors & demand drivers
Nortek Buy Good product sectors & demand drivers Nortek 2015 results at actual rates3 at a glance… …and at £1 : US $1.30 Security & Ergonomic & Security & Ergonomic & Air Home Productivity Central 2015 Air Home Productivity Central 2015 Management Automation Solutions costs Group Management Automati
Slide 11: A helpful market backdrop
Nortek Buy A helpful market backdrop 1. Residential repair and remodelling spending1 2. Non-residential Repair & remodel and new 49% construction spending3 ($bn) 39% Nortek Nortek Sales Sales Homeowner improvements and repairs ($bn) CAGR CAGR +4% +6% 378 598 362 561 533 347 510 498 332 483 318 463 4
Slide 12: High leverage but no significant other liabilities
Nortek Buy High leverage but no significant other liabilities December 2015 Balance Sheet position 31 Dec 2015 31 Dec 2015 £m at actual rates4 at £1 : US $1.30 Fixed assets, intangible assets and goodwill 912 1,034 Net working capital 198 224 Pensions and retirement benefits (32) Updated (36) for US
Slide 13: Underperforming its potential
Nortek Buy Underperforming its potential 2015 2015 Nortek results1 2012 2013 2014 at actual rates at £1 : US $1.30 Revenue (£m) 1,440 1,497 1,666 1,653 1,943 Headline2 operating profit margin (%) 8.9% 8.1% 8.7% 8.7% Updated 8.7% for US$ rate Leverage4 4.1x 4.2x 4.7x 5.1x 5.1x Highlights Organic By M
Slide 14: Nortek
Buy Improve Sell Nortek Buy Improve Sell Buy Improve Sell 14
Slide 15: Melrose track record; Nortek fits the bill
Nortek Improve Melrose track record; Nortek fits the bill Investment Return on IRR in the Actual value creation on previous deals: equity businesses2 1. 7% 56% 3% 34% 2.3x 33% 25% Elster: Sales Margin Cash Multiple growth growth generation expansion 53% 29% 18% 3.4x 33% 62% 2. FKI1: Margin Cash Mult
Slide 16: Five opportunities to improve
Nortek Improve Five opportunities to improve How Melrose can help improve Nortek: Cost savings from 1. Removal of US listing costs delisting 2. Operational Current restructuring projects to deliver improvements with significant further restructuring opportunities available 3. Increased Opportunities
Slide 17: Cost savings from delisting
Nortek Improve Cost savings from delisting Headline2 operating Headline2 Headline2 profit pre central operating operating profit Revenue costs Central costs Profit margin Proforma 2015 year end numbers1 £m £m £m £m % Current Melrose 261 39 18 21 8.0% Nortek 1,653 171 27 1443 8.7% Combined 1,914 210
Slide 18: Margin improvement opportunities from investment and restructuring
Nortek Improve Margin improvement opportunities from investment and restructuring Margin improvement opportunities 1. Underway Restructuring projects Cost savings New product development >£15m1 improvement still to come > £30m1 of reductions underway Significant focus on developing new Total restruc
Slide 19: Reduce the burden of debt to free up cash flow
Nortek Improve Reduce the burden of debt to free up cash flow Currently high and expensive debt Current cost of debt: Over 7% p.a. Melrose will reduce this to less than 3% p.a. Leverage1 and the cost of debt will be more than halved by Melrose Leverage1: 5.1x Melrose will reduce this to c.2.5x Lever
Slide 20: Divisions
Buy Improve Sell Divisions Buy Improve Sell 20
Slide 21: Air Management (64% of Nortek sales)
Air Management (64% of Nortek sales) Air Management – headline1 results Actual 2015 2015 Revenue by business 2015 at £1 : US Growth on at £1 : US £m $1.53 2014 $1.30 26% Air Quality & Home Revenue 1,060 -2% 1,246 37% Solutions Headline1 ebitda2 113 -11% 132 Residential & Commercial HVAC Headline1 eb
Slide 22: Air Management (64% of Nortek sales) cont…
Air Management (64% of Nortek sales) cont… Air Quality & Home Solutions Residential & Commercial HVAC1 Custom & Commercial Air Solutions (AQH) (RCH) (CAS) (37% of Air Management sales) (37% of Air Management sales) (26% of Air Management sales) #1 2 #1 2 #1 2 in commercial in range unit heaters & in
Slide 23: Security & Home Automation (22% of Nortek sales)
Security & Home Automation (22% of Nortek sales) Security & Home Automation – headline1 results Actual 2015 2015 Revenue by business 2015 at £1 : US Growth on at £1 : US £m $1.53 2014 $1.30 Revenue 364 -7% 428 23% Security & Control 77% Solutions Headline1 ebitda2 35 -2% 41 Audio, Video & Control He
Slide 24: Security & Home Automation (22% of Nortek sales) cont…
Security & Home Automation (22% of Nortek sales) cont… Security & Control Solutions Audio, Video & Control Solutions (SCS) (AVC) (77% of Security and Home Automation sales) (23% of Security and Home Automation sales) #3 1 Major supplier of in residential audio, visual security & control hardware sol
Slide 25: Ergonomic & Productivity Solutions (14% of Nortek sales)
Ergonomic & Productivity Solutions (14% of Nortek sales) Ergonomic & Productivity Solutions – headline1 results Ergonomic & Productivity Solutions Actual 2015 2015 (ERG) at £1 : US Growth on at £1 : US (100% of Ergonomic & Productivity solutions sales) £m $1.53 2014 $1.30 Revenue 229 +19% 269 #1 3 H
Slide 26: Transaction structure & timetable
Buy Improve Sell Transaction structure & timetable Buy Improve Sell 26
Slide 27: Summary of deal…
Summary of deal… Melrose proposing to acquire Nortek for $86 per share ‒ Equates to a Nortek Enterprise Value of £2.2 billion (excluding costs) ‒ Break fee payable to Melrose of $50 million ‒ Tender and Support Agreements to be entered into by Ares Management LLC and others (totalling 68.7% of Nor
Slide 28: Transaction funding
Transaction funding Rights Issue summary New debt facility $1.25 billion committed five year facility Underwritten on certain funds basis Proposed gross proceeds c.£1.65 billion ‘All in’ total interest cost less than 3% Rights Issue terms 12 for 1 Closing price as of 5 July 2016 409.75p
Slide 29: Expected timetable
Expected timetable Transaction announcement, posting of circular and notice of General Meeting and publication of the prospectus: 6 July Melrose General Meeting: 25 July Record date for rights issue: 4 August End of window shop period 6 August Nil-paids trading expected to commence: 9 Augu
Slide 30: Appendices
Buy Improve Sell Appendices Buy Improve Sell 30
Slide 31: Price paid – multiple of ebitda
Price paid – multiple of ebitda1 Historic3 Current4 basis year $m $m Price paid Nortek announced adjusted ebitda1 Price per share $86 2015 full year minus 2015 Q1 plus 2016 Q1 Number of shares 16.7m 281 (267 – 46 + 60) Analysts’ consensus4 2016 301 Price paid $1,436m IFRS and Melrose accounting poli
Slide 32: Foreign exchange sensitivities
Foreign exchange sensitivities Impact on Nortek headline1 operating profit of a 10% strengthening in the following currencies Transactional Headline1 Translational Headline1 impact operating profit impact operating profit Currency £m sensitivity £m sensitivity USD 3.8 3% 13.2 9% CNY (9.3) (7%) 0.1 -
Slide 33: Bonus adjustments
Bonus adjustments The effects of the Rights Issue Rights Issue summary Rights issue is treated as a bonus issue of shares and an issue of fully Bonus element paid up shares Share price at close 5 July 2016 409.75p Rights issue price 95.00p The bonus factor is used to reflect TERP 119.21p the bon
Slide 34: US GAAP to IFRS conversion
Nortek US GAAP to IFRS conversion Depreciation Other (incl 2015 results1 and Operating Finance non-GAAP Net £m Ebitda2 amortisation profit costs Tax adjustments) income Nortek results under US GAAP and Nortek accounting policies 174 (77) 97 (66) 2 (51) (18) Exclude amortisation of acquisition relate
Slide 35: Improvement in operating performance
Improvement in operating performance Headline1 operating margin improvement Average increase in 24% +6ppts (>30% improvement) operating margin of 5 to 9 percentage points, 22% +9ppts (>70% improvement) improving the 18% profitability of the McKechnie businesses by between 40% and 70% 13% 16% Elste
Slide 36: Track record for a shareholder
Track record for a shareholder Total shareholder investment… £ billion Total money invested (2.0) Total money received back 4.3 Net shareholder investment retained 2.3 Market capitalisation1 0.5 Net shareholder gain 2.8 Elster FKI McKechnie / Dynacast Acquired for £1.8bn £1.0bn £0.4bn Bolt on acquis
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