Only Ergotron Remains…for Now…from the Original Acquisition
Melrose PLC, the private equity turnaround expert that purchased the entirety of Nortek back in 2016, unceremoniously let it slip in a bullet point of a report on financial results, that it has found a buyer for the last remaining piece of the Nortek puzzle they have struggled to turn around over the years. Although they did not name the buyer, Melrose says a contract has been signed for a $285 million deal – remarkably low considering all the brands included in this transaction.
See more on the sale of Nortek Control by Melrose
As longtime readers of Strata-gee know, I have followed the long and troubled history of Nortek and its various subdivisions, such as Core Brands, as a largely industrial and commercial products company sought to get into the residential technology space, an area they clearly knew very little about. As many of their acquisitions began to struggle, eventually the whole company became troubled, ultimately selling itself…the whole kit and kaboodle…to Melrose, a turnaround specialist with the motto “Buy, Improve, Sell.”
Melrose, whose investments tended to be in the industrial and commercial spaces, felt they could reorganize the company, restructure its finances, and improve its profitability – which is what they do. They acquired Nortek in total for approximately $2.8 billion and began their improvement process. However, I was skeptical of their plans for the technology divisions – such as Core Brands (AV) and 2Gig/Linear (Security) – as technology just wasn’t a business in which Melrose appeared to have any interest or expertise. Less than 24 months after the initial acquisition, various Melrose executives began floating the idea of a divestiture of the Nortek division to the media in what felt to me like a trial balloon. Nothing seemed to come from that publicity, which was largely in the business press in the U.K.
Melrose Gets Serious About Selling Off Nortek in 2020
Then, in 2020, I reported that the company had decided to put Nortek on the block and that this time it looked like a serious effort. Melrose was struggling with its greatest management challenge yet, its acquisition of a very large and struggling U.K. automotive and aerospace company – GKN. However, 2020 turned out to be a bad year to try to find a buyer during a raging pandemic that had disrupted not just the United States, but the world. So they pulled back from that initiative to try and bide their time.
Finally, earlier this year in March, I reported that the company was ready to move forward on selling off Nortek – at least its more profitable commercial and industrial air handling businesses – as the world at that time seemed to be pulling out of the pandemic (the troubling Delta variant had yet to arrive). Lo and behold, just one month later in April, they successfully disposed of Nortek Air Management to Madison Industries of Chicago, IL in a deal valued at $3.625 billion.
Nortek May Not Be One of Melrose’s Greatest Successes
Interestingly, Melrose has yet to identify the buyer. That makes this announcement a little unusual for them and we’ll have to wait to see who emerges as the winner of that deal.
But my back-of-the-napkin analysis of this total divestiture of Nortek suggests to me that this is not one of Melrose’s greatest successes. The total value of the sale of the two divisions works out to about a $3.91 billion against a $2.8 billion purchase. It took five years to buy-improve-sell to earn the resulting 1.4 return ratio.
Return on Nortek of 1.4; Return on FKI of 2.6
However, to be fair, the company has been able to take money out of the company during the period they’ve owned it, which means they likely had a greater total return. But they were also putting money into it during the reorganization as part of the turnaround. So I would have to do more study to determine the total realized value.
However, consider this fact: in the same document that they revealed they were finally able to find a buyer for Nortek Control, they also reported the successful sale of Brush (an industrial electrical company) which was the final division of an earlier FKI acquisition – which netted Melrose a 2.6 equity return. That is a substantially healthier return than they realized from Nortek.
Nortek Control: 14 Brands in 8 Market Segments
Also, consider this, whoever it is that is buying Nortek Control is taking over a portfolio of 14 different brands (although they’ve announced the discontinuation of the Niles and Sunfire brands, but still list them) serving no fewer than 8 different market segments. The brands currently showing on their website are 2Gig, Linear, Elan, IntelliVision, SpeakerCraft, Geffen, Proficient, Panamax, Furman, Mighty Mule, Numera, Xantech, Sunfire, and Niles. The market segments they target are Artificial Intelligence, Security, Access Control, Perimeter Access, Smart Home Automation, Audio/Video, Power Management, and Health & Wellness.
That means the $285 million acquisition deal equates to roughly – again, quick, back-of-the-napkin analysis – about just $20 million per brand. Yet, I know for a fact that not that long ago, just one of those brands by itself had more than $100 million in business. So, the deal value seems quite low in my mind. It seems as though Melrose was looking to do a quick, down-and-dirty, just get rid of it deal.
Melrose Chooses to Retain Ergotron
Of all of the divisions that Melrose purchased when they acquired Nortek, they have decided to retain – for now anyway – Ergotron. In a recent report, Nortek says that Ergotron’s business grew a solid 11% in the first half of 2021 and their profit margin increased 0.8% during the same period as they exited some lower-margin products.
It will be interesting to see just who the purchaser of the Nortek Control business turns out to be.
Learn more about Melrose by visiting melroseplc.net.
For more information on Nortek Control, be sure to visit nortekcontrol.com.
Ted an interesting speculative spin surely the final announcement will bear out some truths. Keep in mind, these segments were never the dog but very much the tail of the original Melrose transaction.
Guessing on returns from the outside is a bit iffy you think?
For our niche segment at $285M this is not a paltry sum. Evidence Snap ONE recently and formerly C-4 buyout and others. Most of the 110 plus no-shows at CEDIA EXPO you reported on represent smaller companies under $100M particularly when sliced into residential technology.
Isn’t the real story what is the go forward plan and is the industry growing? Where there might be a pivot? And what implications this has for clients, dealers and other stakeholder? Sensational no doubt.
Hi Paul,
Thanks for visiting with us today!
“…an interesting speculative spin…” I’d like to think that is my analysis is a little more than just pure speculation, as I’ve been following this company closely for years…as well as possessing a pretty good business judgment.
“Guessing on returns from the outside is a bit iffy you think?” Not really, there are thousands of highly paid folks on Wall Street – called analysts – who do just that…every day. But I revealed my caveats, that fact that they likely had returns during the ownership period not included in my numbers. I may not be spot on, but I’ll bet I’m close.
Paul, you know the private equity guys – and the turnaround guys. They aren’t looking for 40% returns. They are looking for what they call 3-baggers, 4-baggers, or 5-baggers – i.e. 3, 4, or 5 TIMES their original investment returned back to them. This was far from that.
“For our niche segment at $285M this is not a paltry sum…” Well, I guess I can only say everything is relative. If, for example, Elan alone sold for $285 million, I might agree with you on that. But this sale includes 14 brands and sources tell me that their security-centric brands such as Linear access control, Linear perimeter protection, and 2Gig are the real prizes here. That suggests a very low valuation for the audio brands.
“Evidence Snap ONE recently and formerly C-4 buyout…” You kind of make my point. SnapAV purchased Control4 for $680 million. And while you’re correct that there have been some other lower buyouts, that only suggests that our industry’s value is collectively troubled…not that this deal is a rich one.
“Isn’t the real story what is the go forward plan and is the industry growing? Where there might be a pivot? And what implications this has for clients, dealers and other stakeholder (sic)?” I’m not sure these things are the “real story” but they are good stories. Unfortunately, until Melrose identifies the buyer and they share their vision…we can only guess.
Thanks for your thoughts on this!
Ted
Ted, I was only looking to give your readers a little perspective. The entire CI factory sales revenue market is $2B to $3B and the biggest players do most of their business outside CI. e.g SONY, Samsung, LG, Lutron, Epson, etc. Check me but SNAP’s Market cap is about $400M? Most of the brands are $10M to $50M with a small cadre above $100M in annual revenues.
Just guessing and some pedigree to do so, but I would think the security business is the play here
and the buyer will be less known than you might think. I guess I object to the negative tone but then ….
not every investment is a home run or a four bagger. The good news is there is an interested investor who will do their best to perpetuate the lines that survive in an every changing marketplace.
Paul,
> I was only looking to give your readers a little perspective.
Paul, let me assure you that you are always WELCOME to provide perspective on Strata-gee stories at any time. Debate on topics DOES NOT have to be a blood sport. The problem I have with this response is that I feel you are shooting from the hip. That’s the funny thing about numbers, without knowing where you got these numbers (i.e., “the entire CI factory sales revenue market is $2B to $3B” [a huge range, no?]) I am unable to comment on them. Statistics can be used to make just about any point…and in any event, they are only as good as the veracity of the research company that collects them.
But as your “guessing” of Snap One’s Market Cap of $400M shows, you were way off on your assessment – by a factor of nearly 4 times. Good on you to correct yourself…you know I would have caught that, remember, I cover Snap One as well. And I’m not sure market capitalization…a Wall Street measure…is an accurate reading of true value of any company anyway – but that’s a subject for another discussion.
Allow me to give Strata-gee readers some context that might perhaps suggest why you got a little prickly about my judgment on Nortek and its many, many brands. For the few of you who don’t know, Paul was a top executive at Nortek’s Core Brands division as its Chief Marketing Officer. Prior to that, he was a top executive for many years at Elan, a Nortek brand.
I always like to say about my coverage of companies like Nortek, I don’t have a horse in this race, so I can be objective in my coverage.
Finally, I think Paul’s criticism is fair – even though I don’t share his thinking. When companies do good, I say so. When companies do poorly, I don’t sugarcoat it. A clear-eyed, honest assessment is what my readers expect and I try to deliver. I’m human, I make mistakes – but I strive for honesty.
Commenters like Paul, help to keep me honest!
Thanks for sharing your thoughts Paul!
Ted
Correction $1.5B market capon $900M+ revenue.
$285 seems very low for Nortek Control. Consider some other numbers that I was able to pull out of the 2020 Melrose annual report:
2020 Revenue (38% of “Other Industrial Revenue”) was £238M, or about US$308M.
2020 “Goodwill and other intangible assets” was £276M, or US$357M.
I’ve heard that there is a “back of the napkin” formula that a company is worth some multiplier of the revenue. Clearly, as Nortek Control is being sold for less than their 2020 revenue, that formula isn’t being used here.
Melrose specializes in turning around manufacturing companies, and it has been evident that they had no clue how to manage a company that does software and technology, and apparently, they have no idea how to sell such a company either. I mean, look at the sale of Ring to Amazon for $1.2B+. And that is one brand with just a couple of products. A company like Nortek Control with several brands and many strong product line portfolios should have been worth more than Ring.
So from the outside, it looks like Melrose gave up on Nortek Control and sold it at the pawn shop for far less than it was worth. Clearly, Melrose isn’t super proud of the sale, given how they announced it (just enough so that they can classify it as a ” discontinued operation” in their financial reports and avoid providing as many financial specifics).
But Nortek Control, internally, is a complete mess from what I hear, and maybe the low price tag is more appropriate for such a dysfunctional company. If you look at the employee reviews at Glassdoor.com, you see that most of them are either very good or very bad. The very bad ones tell of corruption, high turnover, bad managers, and misery. The very good ones are all written with the same tone and voice that makes me think that they are written by the same one or two people (from HR?). Think of how bad a company must be if you have to write fake reviews to try to trick people to apply for a job.
Here is another indicator of how weird things are there. In the 2019 annual report, Melrose promised a “next generation security panel planned for release in 2020” which we now know is the 2GIG Edge, released in Q2 of this 2021. (Yes, they missed the release schedule, but that is not the weird part). Just about the same time that the new Edge panel was released, they closed the main 2GIG offices in Lehi, Utah. Does that sound like a good business strategy? To close the office where your new flagship product is being developed? I think it was all part of a Melrose plan to increase revenue from a new product, and decrease costs at the same time. Of course, it significantly hurts the company’s ability to continue creating new products. But if prospective buyers are paying more attention to the financial sheet, then Melrose has more to gain by selling out the company’s future for today’s profit. (Except that the $285M doesn’t sound like Melrose gained much for cooking the books, which is why I’m so confused).
Maybe we’ll have more clarity once we know who the actual buyer is and what their plans are.
Thanks for this analysis Ezra! Very interesting…
Ted
It looks like we finally know who bought Nortek: https://www.niceforyou.com/na/nicepost/nice-acquires-nortek-control (I’ll try to avoid the nice puns)
Overall, this looks like a trout swallowing a much bigger trout.
I think this could be a good situation for Nice and Nortek, but I think it is going to be a challenge (growing pains) to merge these two companies together. Nice will all of a sudden have 4X the number of brands and at least 3X the number of market segments. That will be a lot to manage.
I’m very interested to hear your thoughts.
Hi Ezra,
Thanks for your thoughts. I wrote about this deal here: https://www.strata-gee.com/nortek-security-control-acquired-by-italys-nice/
Ted
Ted,
Any insights on who may be trying to acquire Ergotron for Melrose