The three musketeers revive the dying art of the deal
Just the word 'deal' seems a throwback now, let alone buying an engineer. Martin Baker meets the men behind the Melrose investment vehicle
Sunday 27 April 2008
It's not hard to explain what happens in the car crash that is the City these days. Most corporate financiers are saliva-drooling basket cases who develop a nasty nervous tick at the mention of the word "deal".
So when the chance comes to meet the three men who are putting together a genuine, old-fashioned transaction – some £900m worth of transaction – it clearly has to be taken.
This deal is in fact quite heroically counter-cultural. Melrose, a quoted investment vehicle masterminded by chairman Christopher ("Jock") Miller, chief executive David Roper and chief operating officer Simon Peckham, is making a recommended offer for FKI, a quoted engineering concern cited as a takeover target for many a year. But not only are these three musketeers doing the deal, they are travelling back in time in the way they are doing it.
Melrose is paying in cash (the company raised some £290m from a share placing recently) and is also offering some of its own paper. This charmingly back-to-basics method of funding is partly a function of necessity, given that you can't raise a smile in the credit market at the moment. Factoring in FKI's debt, the company price tag leaves little change from £900m.
And it's an engineering company too. As I head up in the lift of Melrose's plush St James's offices, I wonder whether I'm going to be greeted by Sir Nigel Rudd and told that Kidde and the era of the 1980s industrial conglomerate has come back.
In fact, I'm soon shaking hands with Peckham, a stocky Geordie with a firm grip and killer baby-blue eyes. The second musketeer waiting in the boardroom – with its slightly creepy, wall-mounted Big Brother eye sculptures – is the chief executive.
Roper has some 10 years on Peckham, who's in his mid Forties, but he has the enthusiasm of an eight-year-old. "We felt that the private equity people had been having it all their own way," he smiles. "We're operational – we're turn-around people. What we wanted to do was have a currency other than just cash, and offer management a way of participating in the upside. They say 'here's the cash' and the game's over. They're fishing in that part of the pond. We fish in the operationally-challenged-business part of the pond."
Not to mention the improbably-extended-metaphor part of the pond. But that hardly matters. The Melrose team are fairly falling over themselves to express their excitement at getting this offer agreed.
This is partly, one suspects, because Roper and Miller have rediscovered their youth, in a sense. They were the driving forces behind the Wassal conglomerate of the 1980s and 1990s (they sold it to American private equity firm KKR in 2000).
"Miller and I then farted about improving our golf handicap for a couple of years," says Roper. But by 2003 they had become restless. "Keith Anderson at Investec had been our corporate broker. We approached him and asked if he thought there was an appetite for coming back to what we'd done at Wassal in a slightly new guise but with a publicly listed vehicle. We went round and saw the fund managers. The feedback was that they were quite interested."
So with £2m of their own capital and £11m from the City, Melrose was set up. It has already done one notably successful deal, involving the engineering and aerospace firm McKechnie.
I quickly come to realise that Peckham is the hard man of the three, the one who is closest to being a workaholic and the one who pulls the trigger if the management of the acquired company doesn't come up to scratch.
"Public companies take too fucking long to improve their businesses," he says. "All they're interested in is 1 per cent incremental growth. If you're a chief executive of a public company, all you want is 3 per cent earnings growth for all your tenure.
"The venture capitalists come in and do a programme of diligence that takes 10 times as long as it should, but actually they have a plan. They don't have a management team that's rewarded on that plan. One of the things we do is have a management team that's rewarded on that plan, on the shares of their own company, not on Melrose's."
Ah, shares. Melrose's investor register reads like a roll call at a fund managers' party: Threadneedle, Artemis, Standard Life, Scottish Widows, the list goes on. These institutions must be a demanding bunch to satisfy. Peckham acknowledges that the 18 per cent per annum return achieved for investors in Wassal is a good benchmark.
But where is the third musketeer? Jock Miller is well-known and liked in the City. In the 1980s, when lunches could be lengthy, he was a respected practitioner of this art form.
So is Miller in a restaurant, holding an investor's hand? No. The cash having been raised and the first part of the deal done, Miller has gone to thrash the adrenalin out of his system on a golf course in Portugal. "It's fun here," says Peckham. "We work hard, we play hard." So while Miller relaxes for a couple of days, the other two are taking the deal forward. Short of a third party coming in and making a bigger offer for cash, the transaction looks a shoo-in.
Roper and Peckham clearly believe they can turn round one of the most examined prospects in the sector: "We find fundamentally good businesses which are badly managed but need a change of culture," says Roper.
"Changing the culture in the first three to six months is the vital thing. We're all over these businesses for that period. We appraise management and change it where necessary. We work on a business plan with management for a two to three- year period. It's important they buy into it. Then we keep very close tabs on them. Once they start producing results, we begin to step back slightly."
Peckham and Roper are complimentary about the FKI board, which they believe has acted in the best interests of its investors in dealing with the offer. But after the deal has closed, one suspects, comes the hard part for management: "We sit down with people when we're interested in their businesses," says Peckham. "We invest and we basically trust them – not blindly, but basically trust them. The second we lose that, they go. We're not hire-and-fire people, but if they lose the trust there's no way back."
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