Melrose in talks over £1.4bn bid for Elster Group

AFTER four years with no major investments, manufacturing buyout specialist Melrose yesterday confirmed it is in talks to buy German engineering firm Elster Group.

Following speculation over the weekend, Melrose yesterday confirmed it was pursuing an all-cash deal that values Elster at $2.3bn (£1.4bn), offering $20.50 per Elster’s American depositary share. The price is a 25 per cent premium to Friday’s closing price.

Elster, whose shares rose 18 per cent to $19.41 yesterday, is reported to be holding out for seven per cent more than the bid. However, analysts say it’s unlikely to succeed in raising the offer.

Melrose said that it would not go ahead with the deal without a recommendation from Elster’s board or an undertaking from its majority shareholder, Rembrandt Holdings, a unit of private equity firm CVC Capital Partners.

According to analysts, Melrose is in a strong position with CVC, and a recommendation is considered likely.

If successful, the investment would also be Melrose’s largest to date.

“Although it doesn’t appear like a bargain, it’s a high quality target with margin headroom,” Ben Bourne, equity analyst at Liberum Capital told City A.M.

“Melrose has an excellent track record of creating value so we think the deal will be supported,” said Bourne.

Elster embarked on a cost saving programme in the first quarter, including closing four major facilities and consolidating operations and sites.

“The restructuring programme in place would add two per cent to the margin and that’s before Melrose has worked its wizardry,” added Bourne.

Melrose plans to finance the majority of the deal through a $1.87bn rights issue.