One to Watch

MELROSE was floated on AIM in October 2003. Its strategy is to acquire under-performing engineering businesses and extract value by improving performance with a view, subsequently, to capitalising this progress by selling on the assets.

In May 2005, Melrose acquired two specialist engineering companies, Dynacast and McKechnie. Most of McKechnie has now been sold-on at a profit, whilst the board continues to hold Dynacast, the world's only manufacturer of small precision die-cast zinc: Gillette is its largest buyer.

Melrose is, by its nature, deal-driven and it is still a relatively young company. Nevertheless, its short business life has been impressive; it delivered an IRR of around 65 per cent over two years on McKechnie Aerospace.

Melrose has now launched an agreed bid for FKI, using its usual structure of cash and equity. FKI is a classic Melrose target, an engineering firm somewhat down on its luck but with an important business, which includes being the world's No 1 independent supplier of turbo generators and a world leader in fittings and lifting products.

The international engineering industry is having its problems, particularly rocketing steel prices. On the other hand, Melrose's modus operandi – with a highly financially literate board – is impressive and the FKI acquisition, provided it is not trumped by a third party, has all the hallmarks of Melrose's industrial perspicacity. Offering a yield of 4.5 per cent and a share price well off its all-time peak of 208p, Melrose looks well placed to take advantage of the corporate trading challenges being faced elsewhere.

The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.