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Melrose means business after Charter defeat (whatever Ed Milliband says)

Why Melrose (NYN.L) shares look good value and why Ed Milliband's division of businesses into 'predators' or 'producers' is flawed.

 
Melrose means business after Charter defeat (whatever Ed Milliband says)

Like many people I was unimpressed by Ed Milliband’s conference speech this week. The Labour party leader is no orator and his text – which looks like a weird epic poem – was too staccato for my liking.

False distinctions

However, as he dug himself into a hole by wittering on about ‘producers’ and ‘predators’ in the business world, I was pleased to see him make the distinction, ‘not financial engineering, but real engineering’.  I’ve heard that phrase somewhere before, I thought. Oh yes, it was, of course, a direct reference to my article for the launch of Citywire Top Stocks last weekend! Glad to see Ed is a regular reader.

In case you didn’t read it. ‘Top Stocks: real engineering, not financial engineering’ highlighted how the five fund managers in our Top Stocks panel have gone underweight in banks and financial stocks and overweight on manufacturing and industrial groups such as GKN (GKN.L), Weir (WEIR.L), IMI (IMI.L) and Cookson (CKSN.L).

This was a good way of highlighting some of the companies in Top Stocks, however, I admit it ran the danger of being overly simplistic, a bit like Milliband’s analysis. Companies that ‘make things’ are not inherently better than companies engaged in financial services, just as it is not possible to divide companies between predators and producers, however appealing that might be for a politician seeking to come to terms with the credit crunch and its aftermath.

What is Melrose?

I was struck by this thinking about Melrose (NYN.L) this week. Melrose, an ‘engineering investment business’, was in the news after giving up its chase for Charter International (CHTR.L), the underperforming owner of two businesses involved in welding and air and gas handling.

Much to the anger of its biggest shareholders, Aviva and Schroders, Charter decided to focus on a higher bid from US manufacturer Colfax. This is not the reaction you’d normally expect from City institutions. Although Colfax is offering 910p per share (valuing Charter at £1.5 billion) Aviva’s David Lis and Schroders’ Richard Buxton (one of our Top Stocks fund managers) preferred the 850p per share on the table from Melrose as it gave them a decent chunk of cash (297p per share), but also shares in Melrose. In other words, they could have remained invested in the Charter businesses to enjoy further potential profits under Melrose’s more efficient management.

Melrose has a good track record of buying engineering assets and making them sweat. Only last month it paid out £373 million to shareholders with a bumper special dividend of 85p per share after selling Dynacast, a die-casting business.

Analysts have praised chief executive David Roper and the Melrose management team for walking away from Charter and not getting dragged into a bidding war. Colfax is controlled by the billionaire brothers Steven and Mitchell Rales so it could have got very expensive. 

‘It [the decision to withdraw] demonstrates pricing discipline which is core to the Melrose proposition,’ commented Harry Philips of Evolution, referring to the company’s ‘buy, improve, sell’ strategy. He has a ‘buy’ on Melrose and a 430p target for the share price, compared to its current level of 300p.

Bid speculation

Melrose’s move prompted speculation about its next target. Top of the list is Cookson (CKSN.L), the materials technology specialist and Citywire Top Stock. Cookson has a chequered history so it is understandable why its name crops up. However, Edward Legget of Standard Life Investments, another of our Top Stocks fund managers, explains why it is a top 10 holding for him saying, ‘it is a much better business than people give it credit for.’ Philips of Evolution agrees, arguing a Melrose approach is unlikely as Cookson is now well run and margins would be hard to improve.

Other names in the frame are Laird (LRD.L), the electronics group; Morgan Crucible (MCGR.L), the advanced materials technology provider; and Bodycote (BOY.L), the materials testing and heat treatment specialist.

All this speculation underlines the point made by Derek Stuart, another of our Top Stocks fund managers, in his market commentary on Citywire Money. Stuart, manager of the Artemis UK Special Situations fund, said that the rate of mergers and acquisitions would increase as companies and investors reacted to the distressed stock market conditions. Already this week has seen renewed speculation about a possible break-up of Smiths Group (SMIN.L) and London Stock Exchange (LSE.L) move into pole position to buy the clearing house LCH.Clearnet. Both are on Citywire Top Stocks.

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3 comments so far. Why not have your say?

S-ville

Sep 29, 2011 at 15:09

Of course Milliband's explanation was simplistic - the nature of conference speeches is that they are high level overviews.. If he'd gone into the detail you seem to be demanding, you'd have criticised him for being long-winded and pedantic.

'Predator or producer' is a handy short-code (a soundbite if you will) that will presumably be fleshed out over the coming months and years.

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Faizel Balti

Sep 29, 2011 at 20:09

I personally found Ed Milliband's speech excellent - just what I wanted to hear and what the nation needs to hear. He's guaranteed a shift in the political spectrum of Labour back to its roots and, most importantly of all, made it certain that Labour will be left in the political wilderness for many years to come! Well done Ed.

Faizel Balti

ps perhaps that should have been 'Left in the political wilderness' - with a capital 'L'!

pps and just to keep on topic - I have a holding in Melrose - this is an outstanding investment opportunity.

FB

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Mcx Tips

Oct 05, 2011 at 10:14

This is the perfect blog for anyone who wants to know about this topic. It contains truly information. Your website is very useful. I admire the valuable advice you make available in your expertly written content. I want to thank you for this informative read; I really appreciate sharing this great.

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