By Aashika Jain and Roshni Menon
(Reuters) - Engineering turnaround specialist Melrose Industries Plc (L:MRON) signalled it could sell its Elster Water business, a maker of water consumption meters, as it scouts for its next big investment.
The British investment firm, which follows a buy-improve-sell strategy akin to private equity firms, has held the business since acquiring the 100-year-old Elster engineering group for 1.8 billion pounds in 2012.
"We've quadrupled (Elster Water's) operating margin and tripled profit in a year, and I think it will be fair to say we've done a lot of our work to it," Melrose Executive Vice-Chairman David Roper told Reuters.
Elster, Melrose's largest acquisition, also houses gas and power consumption meter businesses.
Exane BNP Paribas analyst Jonathan Mounsey pegs Elster Water's 2015 implied enterprise value at 298 million pounds , or 30 pence per share. The business brought in revenue of 179.9 million pounds in 2013, or about 10 percent of Melrose's total revenue of 1.73 billion pounds.
Melrose shares were trading up 1.6 percent at 275.20 pence at 1410 GMT(03.10 p.m. BST) on the London Stock Exchange. The stock has gained more than a fourth of its value since the Elster acquisition.
According to Thomson Reuters Starmine, Melrose has an intrinsic value of 318.99 pence. The model is a measure of how much a stock should be worth currently when considering expected growth rates over the next 15 years.
Melrose has a market capitalisation of about 2.90 billion pounds.
NEXT BIG ACQUISITION
Melrose - which traces its roots to engineering-turnaround firm Wassall Plc that was taken private by KKR (N:KKR) in 2000 - sold five companies from its FKI business last year for a total of 950 million pounds.
Melrose returned 600 million pounds to shareholders following the sale, pushing the company out of Britain's blue-chip FTSE-100 index.
The company is now looking to buy a manufacturing business in North America or northern Europe for 1 billion to 3 billion pounds, said Chief Executive Simon Peckham, who co-founded Melrose in 2003 along with Roper and Executive Chairman Christopher Miller.
Peckham declined to specify a timeframe for its next deal.
"Where we are at the moment, it's quite difficult to find acquisitions because pricing is very high ... But sure as eggs is eggs, cycles turn and we're always looking at opportunities," Roper said, adding that Melrose was in the 'buy' phase of its 'buy-improve-sell' model.
Melrose's first acquisitions were of aircraft parts maker McKechnie and metal components-maker Dynacast in 2005, followed by engineering company FKI in 2008 and Elster in 2012, fetching 27 percent average annual return on investment.
RBC Capital Markets analysts, in note to clients on Monday, said they expect Melrose to make an acquisition of about 3 billion pounds in the next 12 months.
"We believe Melrose is finding for-sale, improvable, businesses despite private and public competition. We estimate the group could potentially create as much as 244 pence/share of value from a 3 billion pound acquisition," the analysts said.
(Editing by Feroze Jamal)