Melrose has finally identified its next prey, a week after we last discussed the prospect. Four years after sweeping up FKI, the engineering turnaround specialist is talking to Elster, the German maker of gas, electricity and water meters, about a $2.3bn (£1.5bn) takeover.
Due diligence is under way, but this is not a done deal. Raising the money shouldn't be a problem; a fully underwritten £1.2bn rights issue looks the most likely outcome. But Melrose needs the backing of Elster's largest shareholder Rembrant Holdings, and a rival bidder could always emerge – possibly Siemens – threatening a repeat of last year's unsuccessful bidding war for Charter. Questions are also being asked about Elster's suitability. A "pipe and slippers" deal, as Panmure Gordon calls it, implies that Melrose will have to pay full price for a defensive asset. Still, heavy exposure to the fast-growing gas market looks promising and management should be able to improve deteriorating margins elsewhere.
