Melrose Industries has agreed to buy Nortek in a deal worth $2.81 billion that will allow it to halve the US ventilation products maker's debt and free up cash to take advantage of a strong construction market. Shares in Melrose, an engineering turnaround specialist that buys businesses with the intention of selling them at a profit, rose as much as 42 percent to a record high of 580.5 pence as the market applauded the much-anticipated purchase. Nortek's shares were up 36.6 percent at $85.37 in premarket trading on Wednesday. If the stock opens at that level, it will be the highest in more than 10 months. Melrose has been scouting for an acquisition since it sold its utility consumption metering business to Honeywell International last year, leaving it with only one business, Brush — a manufacturer of electricity generating equipment. Negotiations with Nortek kicked off in March and the deal was set to be announced by the end of June, soon after the Brexit vote, said a source close to Melrose. "Melrose had to take stock of the referendum's outcome and wait for markets to settle down," the source said. "Nortek generates the bulk of its revenues in dollars and remains an attractive opportunity for Melrose." The deal announced on Wednesday gives Melrose access to Nortek's large North American ventilation and home security business against a backdrop of "key US economic indicators pointing to continued momentum in construction" according to the British firm. Although US construction spending recorded its biggest decline in more than five years in April, it contrasted with an upwardly revised jump in March and fairly strong data on industrial production and housing which have bolstered views the economy was regaining speed. Nortek, whose products are in 80 percent of US homes, said earlier it expected 2016 net sales in constant currency to grow. Melrose's cash offer of $86 per share represents a premium of about 38 percent to Nortek's Tuesday close and implies an equity value of $1.436 billion. "It's interesting to see that deals still get done despite Brexit," an M&A banker said. Business valuations are vulnerable to concerns that Britain's vote to leave the European Union could trigger a UK recession. "Melrose is an unusual example of post-Brexit M&A. Only the brave can pull off deals in this environment," said the source close to Melrose. "Some investors are prepared to take on more risk because they have cash to deploy but it's challenging to find a business proposition that still works. The economic impact of Brexit is still unclear," he said. Melrose declined to comment on whether Brexit would create opportunities and said its focus would be to improve the Nortek business. Finance Director Geoffrey Martin said Melrose would consider increasing investment in automation and new machinery for Nortek's manufacturing facilities and seeking complementary acquisitions. Melrose said the deal would be funded by a rights issue of new shares to raise about 1.6 billion pounds and new debt. It will also reduce the debt burden on Nortek, which had filed for bankruptcy in 2009 to eliminate $1.3 billion in debt and emerged from Chapter 11 protection in 2010. Two analysts said another player may counter bid for Nortek. The Wall Street Journal reported last year that United Technologies Corp was briefly interested. This comes amid a string of failed US purchase attempts by Chinese businesses, which are hunting for non-yuan assets abroad despite little foreign buyout experience due to a slowing economy at home. Nortek shareholders holding about 68.7 percent collectively have already backed Melrose's offer, which Nortek's board intends to recommend. JPMorgan served as financial advisor, bookrunner and global coordinator to Melrose. Nomura International and Bank of America Merrill Lynch also advised Melrose on the deal. Barclays and Citi advised Nortek. — Reuters
