Melrose, the acquisition vehicle created by the former Hanson executive Chris Miller, revealed yesterday it was considering a possible offer of up to £647m for Novar, the industrial group formerly known as Caradon.
The buyout specialist said it was considering a bid of 140p-150p a share for Novar and planned to refinance the company's debt of more than £400m as part of the deal. A bid in this range would represent a premium of between 13-21 per cent compared with Wednesday's closing price. Novar shares were up 15.5 per cent at 143.25p yesterday.
Novar responded late yesterday afternoon by announcing that its chief executive designate, Stephen Howard, who was to take up the reins in January, would now be taking up the post with immediate effect. He will start by carrying out a strategic review of Novar's operations.
A key player in the bid battle will be Active Value, the fund management group that owns 16.7 per cent of Novar. Active Value has been looking to sell its various holdings since declaring in March that its funds were in realisation mode.
Mr Miller, who worked as one of the late Lord Hanson's closest lieutenants during Hanson Trust's heyday in the 1980s, went on to form Wassall, another acquisition-hungry conglomerate which itself eventually succumbed to a bid from KKR, the US private equity group, for £627m in February 2000.
His new vehicle, Melrose, said the potential offer for Novar would consist of a combination of new ordinary Melrose shares plus cash. The cash element will be funded by an underwritten placing of Melrose shares.
David Roper, the chief executive of Melrose and another Wassall veteran, said: "I think Lord Hanson, God bless him, if he were around would look at this and say 'yes, it's a good target'. It is very early days. We are trying to raise money from institutions and we haven't got a bid on the table. However, this is not a leveraged deal. This is not a WH Smith or Philip Green type deal. Novar has got good businesses in it that we feel can be managed more aggressively."
The Melrose team also consists of Simon Peckham, another former Wassall director, and Miles Templeman, the former chief executive of Whitbread beer company who joined Melrose as a non-executive director.
Mr Roper said Melrose had banking agreements in place to refinance Novar's existing debt of more than £400m, admitting that Melrose would be willing to go hostile to gain control of the company. "The financing of the debt is there for a hostile bid if necessary," he said.
Novar has three businesses: cheque printing, aluminium extrusion and temperature control systems for the building trade. Novar shareholders will be invited to swap their Novar stakes for shares in Melrose. Novar's senior management, including Mr Howard, the chairman Sir Graham Hearne and the finance director Mike McKeon, are expected to be ousted and the company run by the Melrose team.
Novar has suffered a chequered past of late. In July it announced a 6 per cent fall in operating profits. Although previous Novar management has focused the group on three activities, Melrose believes it still lacks focus and that its operational performance has been hit by the distractions of recent restructurings.
Mr Roper said: "We don't want to get into a slanging match with the Novar management. We think we've got a good team. If we hadn't been flushed out by the Novar share price rising and being forced into making a statement we would have liked to have got our ducks in a row and approached the Novar management."
He added: "This is a good old-fashioned bid. It is a proper bid. The idea is to target businesses that are capable of being improved and allowing shareholders to benefit as well."