– Melrose Industries plc (MRO LN): Melrose represents an interesting low volatility/low downside investment case – On 28 July Melrose announced it had entered into an agreement to sell more than 80% of its business, namely its Elster business (as well as the majority of Melrose’s pension schemes) to Honeywell for cash consideration of £3.3bn (since the acquisition of Elster in August 2012 for £1.8 bn, Melrose has achieved a 2.3x return on its original equity investment and an IRR of 33%). Very recently, Melrose announced its intention to undertake a corporate reorganisation in order to return capital to shareholders of between £2.0bn and £2.5bn. After closing of Elster sale, Melrose will represent about GBP 2.26 capital return per share (between GBP 2.01 and 2.51) and GBP 0.30 for its remaining Brush business (applying 7x multiple on targeted FY16 EBITA of £43 mn). Given its great buy, repair and sell at high IRR track record, we believe buying Melrose in low GBP 2.60s represents attractive, low downside situation, as Melrose is understood to be looking to pull the trigger on its next GBP 2-3bn North-American/European industrials or commodity/energy exposure target in next 6 months. Main timing to initiate Melrose is on potential negative EC Phase 2 review headlines for the Elster/Honeywell transaction.
– BG group (BG/ LN): Shell organised an Investor Day yesterday on 3rd Nov 2015. The overall message was largely unchanged, but incrementally there were positive updates around synergies related to the BG transaction: Shell continues to expect the proposed transaction for BG to complete in early 2016. If all goes well, we should get an update from the ACCC (Australia) on 19th Nov, which typically is then followed by the FIRB a few weeks after. MOFCOM (China) will move into Phase 3 on 5th Nov, which will last ‘up’ to 60 days, where we would expect manageable remedies. As far as identifiable ‘cost’ synergies are concerned, RDS raised the estimate to $3.5bn (from $2.5bn previously). Once the deal is closed, there is substantially more upside to this, most notably related to ‘value’ synergies, which will include synergies from LNG (trading, logistics savings), field infrastructure etc. Another (consistently) bullish message from Shell on BG deal where lot of upper management time and energy is allocated to close and integrate BG. BG spread (0.4454 RDSB + GBP 3.83 cash – BG/) remains stubbornly wide above GBp 110. Remains attractive set up here.