Industrial turnaround specialist Melrose plc (LSE: MRO) has created significant shareholder value since its 2003 listing. Founder and executive chairman Christopher Miller describes the company as a “a sick bay for good industrial companies.”
Take a look at the value created by Miller and co between 2003 and 2015;
- 22% average annual return on investment since its first deal in 2005.
- Turned a net shareholder investment of £0.1bn into £2.9bn between October 2003 and 2015.
The Melrose method
Melrose tends to seek out companies that manufacture niche items with repeat demand, such as filters, that will inevitably have to be replaced. These replacement cycles provide the company with some level of revenue visibility. Melrose prefers a strong competitive position within an industry.
Once it has identified and purchased a company, it focuses on improving cash flow through a combination of job cuts, incentive structures, operational tweaks and investment, before hopefully selling for a profit.
For a while Melrose looked cheap, but the successful sale of Elster for £3.3bn to Honeywell woke the market to its potential. Melrose had acquired the company for only £1.8bn back in August 2012.
It doesn’t do things by halves, more often than not buying entire businesses and working on them for a number of years to turn a profit. This approach has yielded fruit so far, but the sheer size of the transactions means Melrose will likely only be as good as its last deal.
With that in mind, lets take a quick look at its most recently acquired improvement project, Nortek. Last year, 73% of its operating profit was sucked out of the company by interest payments. In one fell swoop, Melrose bought it, cleared its debt and has presumably since got to work improving the underlying business.
It’s an interesting situation, so I’d advise you heavily research Melrose’s other business, Brush, before considering an investment. With that in mind, I believe £22m market cap Volvere plc (LSE: VLE) could be a worthwhile alternative pick.
To roll, to turn about
The company’s name is Latin for ‘to roll, turn about, turn round’ and like Melrose, Volvere specialises in buying ailing businesses, improving them and selling at a profit.
Headed by brothers Jonathon and Nicholas Lander, a Cambridge-educated lawyer and a chartered accountant respectively, Volvere shies away from the industrial companies Melrose chases and instead focuses its efforts on ‘people businesses’.
It does this for two reasons;
- No one else wants to buy struggling human capital. This creates value opportunities for Volvere.
- The brothers have spent their own careers working in people-based businesses and it’s what they’re good at.
It’s an interesting approach, and one that goes against my natural Foolish instincts. After all, an individual can leave, taking key clients or know-how with them. But through an unbroken spell of turnarounds, the company has compounded book value at 14.4% per year since 2002 for a total increase of 513%. And the share price has appreciated at a CAGR of 13% over this period, resulting in a 309% rise.
Right now, the company is working on three turnarounds and the market seems to be placing little faith in its track record as it trades at a slight discount to book value.
So I’d encourage readers to conduct thorough research on Melrose or Volvere before taking the plunge as there are a lot of moving parts to consider.
