Firms Roll Up Their Sleeves After EU Vote

Amid all the wailing and gnashing of teeth in some quarters, following the referendum result, British business leaders – most of whom had overwhelmingly backed "Remain" – are rolling up their sleeves, gritting their teeth and trying to make the best of the hand that has been dealt them.

Nowhere highlights this "the show must go on" mentality better than an announcement made by Melrose Industries (LSE: MRO.L - news) , a company not nearly as well-known to the British public as it deserves to be.

This engineering turnaround specialist, a member of the FTSE 100 between 2012 and 2014, is paying $1.436bn (£1.1bn) for Nortek (NasdaqGS: NTK - news) , an American maker of ventilation products, air conditioning and security systems.

So far, so unglamorous. Yet Melrose is a company whose management boasts a pedigree in turning base metal into gold.

Jock Miller, the chairman, David Roper, the executive vice-chairman and Simon Peckham, the chief executive, specialise in what they call a "Buy, Improve, Sell" business model - buying unloved engineering businesses, investing in them, improving their operating performance and then ultimately selling them on.

Messrs Miller and Roper learned their trade working for the late James Hanson, the legendary buy-out king of the 70s and 80s, before setting up Wassall, a mini-conglomerate based on Lord Hanson's empire, in 1988.

Its stock market value rocketed from £2m in that year to £627m when, in 2000, it was swooped on by the US private equity giant KKR.

After a couple of years on the golf course, the pair tired of a life of leisure and decided to pick up where they left off, setting up Melrose (LSE: 136541.L - news) and backed by a City fan-club – including big name fund managers such as Schroders (LSE: SDR.L - news) , Fidelity and Threadneedle - who remembered the returns that had been generated for them by Wassall.

Their plan was to identify the kind of wealth-creating opportunities normally only available to the private equity sector but, with Melrose as a listed company, open them up to stock market investors.

And how they have done that to date.

Their first success with Melrose was the aircraft parts maker McKechnie and the metal components maker, Dynacast, bought for a total of £429m and subsequently sold for a total of £1bn.

They went on to buy the conveyor belts, industrial hooks and steel ropes maker FKI for £970m in 2008, just before Lehman Brothers crashed, going on to sell some – but not all – of the individual businesses in it for £1.4bn.

This was followed by the £1.8bn acquisition, in 2012, of the utility metering business Elster – which was sold for £3.3bn just under a year ago. In all, Melrose has delivered returns of some £2.8bn to shareholders during its first 12 years.

On the basis of that track record, it is likely that the Melrose team have therefore spotted another business, in Nortek, that would be benefit from a little love and a little investment that, due to the latter's heavy debts, it has so far been denied.

As Mr Peckham noted: "There remains solid potential for further improvement under Melrose's guidance.

"Our ability to apply our industrial expertise and our investment expertise, as well as to liberate Nortek from its current capital structure, will transform the prospects of the business."

One thing that marks out the Melrose management is that, in the past, they have not been afraid to walk away from potential deals when they have decided that the numbers do not stack up.

In 2011, for example, they abandoned a bid for the UK engineering firm Charter, despite months of planning and preparation, after concluding they were unwilling to match the £1.53bn that a rival, US company Colfax, was prepared to pay.

That ought to provide comfort for investors rattled by the referendum.

What makes this deal particularly bold is firstly that Melrose is having to pay in US dollars – a currency against which sterling has fallen by some 12%, and counting, since the EU referendum.

So the arithmetic of the deal and the cost of doing the acquisition have both moved against the Melrose management since they started looking into it.

It is doubly bold because, as with all Melrose deals, the management are having to raise some £1.6bn from shareholders and borrow a further £600m in order to acquire the business and then turn it around.

This is something that, again, might have been less difficult in the wake of the referendum result.

That the Melrose management have had the confidence to back themselves, in spite of the uncertainty created by the referendum result, highlights the no doubt extensive research that they have conducted into Nortek and the markets in which it operates prior to signing off on the deal.

It is a good example of the "can do" attitude that exists throughout UK business – and that should provide cause for optimism for those nervous about the prospects for business following the earthquake of 23 June.