Melrose Budding Capital Return

Rose Bud

Melrose is an industrial trouble shooting firm that have an interesting and lucrative attitude towards delivering shareholder returns, built around an incredibly simple motto; “Buy, Improve, Sell”.

What this means is Melrose scour for good quality manufacturing businesses with strong fundamentals that could benefit from a more focused, value enhancing perspective. Once a business has been discovered Melrose acquire the company and set about installing a team of trouble shooting management to drive better efficiencies and value into that business. Melrose then sell the business and return benefits to shareholders.

Sometimes better value is discerned by splitting a business into core operations and selling some divisions so that better focus is delivered to the remaining parts. This is not reinventing a particular business, but finding ways to enhance efficacious output and dispersing staid performance.

Spending on a big acquisition does not scare Melrose, as their purchase of Elster Group SE in 2012 for £1.8 billion shows.

Melrose have an impressive board of directors, all emanating from top quality blue chip companies. It is abundantly clear that dissemination of facts when considering a new acquisition and determination of a value enhancing plan surrounding that acquisition would be accomplished in a highly expedient manner.

The fruits of such foresight can be seen through Melrose’s relatively short 10 year history, during which time their market capitalisation has been improved from £13 million to £3 billion, with some impressive pay-outs to shareholders along the way.

In August 2007 Melrose returned £220 million to shareholders through a special dividend of 82.3p per share; August 2011 saw a return of 75p per share (£373 million). Melrose has recently announced another return of capital, to the tune of circa £200 million, will be presented for approval early next year.

Technically, buying Melrose shares at this time of the year and holding to April [in all years from 2008] has seen returns ranging from 15% to 52% along the way (assuming exact timing on bottoms and tops) and with the added chance of additional pay-out in 2015 it appears the Melrose buds could well develop into a blooming good return for investors.

Date Company Status Mid Price Target 1 Target 2 Target 3 Target 4
10/12/2014 Melrose Industries PLC Initial write up £2.627 £2.85 £3.06 £3.48 £3.70

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