Melrose to share turnround

Institutional investors gave listed turnround specialist Melrose a big thumbs up as it prepares to take on private equity at its own game. The cash shell, which was floated on AIM in October 2003 to acquire underperforming companies, has conditionally placed new stock worth £232m to finance the acquisition of Novar, a company with interests ranging from bank cheques to aluminium parts production.

The move is a rare attempt to overhaul a company without taking it private. Melrose’s executives stand to reap private equity-like returns if they successfully overhaul the business in the long term. Institutional shareholders would also share in turnround returns generated by any rise in value of Novar.

Melrose has a track-record in turning round underperforming companies. Its directors are led by Christopher Miller, who built up and then sold the Wassall conglomerate in 2000. Melrose has put forward a combination of stock and cash to finance a £625m bid for Novar, which also has £500m in outstanding debt.

The official offer for the company was made last Thursday, and Melrose has 28 days to post an offer document to shareholders. Once this is done, the offer must become unconditional within 60 days, at which stage the stock placing will be completed to finance the cash component.

Novar has emphatically rejected the bid as too low. In a letter to shareholders, it labelled both the price and the structure of the offer as “unappealing”. The company, which reported a US$110.9m loss in 2003 on revenue of US$2.5bn, is now working on a defence and said its own efforts to boost profit and share price were already under way.

The defence might include selling off assets. Novar has also had approaches from other parties, although none of these have yet led to another offer. According to reports, General Electric, Honeywell, France’s Schneider Electric, and Siemens have contacted Novar’s advisers to signal their interest in all or parts of the business.

Bookrunner and underwriter Investec placed 232m shares at 100p, a 24.5% discount to last Wednesday’s close of 132.5p, though the price had jumped from 106p thanks to a statement about a possible offer for Novar the previous week. The stock was primarily placed with existing shareholders keen to participate in the company’s first acquisition. That meant a bias to UK investors in the book, though some international funds also participated. Investec completed the bookbuild over the previous week, closing it once it was well covered

Stephen Howard is due to takes over as group chief executive of Novar. He replaces Jurgen Hintz, who has served as group chief executive since 1997. Hintz is retiring.