By Esha Vaish
(Reuters) - Melrose Industries (L:MRON) is to buy Nortek (O:NTK) in a deal worth $2.81 billion (2.16 billion pounds) that will allow it to halve the U.S. ventilation products maker's debt and free up cash to take advantage of a strong construction market.
Shares in Melrose, an engineering turnaround specialist that buys businesses with the intention of selling them at a profit, rose as much as 42 percent to a record high of 580.5 pence.
Nortek's shares were up 36.6 percent at $85.37 in premarket trading on Wednesday. They were up nearly 40 percent by 1556 GMT.
Melrose has been scouting for an acquisition since it sold its utility consumption metering business to Honeywell International (N:HON) last year, leaving it with only one business, Brush -- a manufacturer of electricity generating equipment.
Negotiations with Nortek kicked off in March and the deal was set to be announced by the end of June, soon after the Brexit vote, a source close to Melrose said.
"Melrose had to take stock of the referendum's outcome and wait for markets to settle down," the source said. "Nortek generates the bulk of its revenues in dollars and remains an attractive opportunity for Melrose."
The deal announced on Wednesday gives Melrose access to Nortek's large North American ventilation and home security business against a backdrop of "key U.S. economic indicators pointing to continued momentum in construction" according to the British company.
Although U.S. construction spending recorded its biggest decline in more than five years in April, it contrasted with an upwardly revised jump in March and fairly strong data on industrial production and housing which have bolstered views the economy was regaining speed.
Nortek, whose products are in 80 percent of U.S. homes, said earlier it expected 2016 net sales in constant currency to grow.
Melrose's cash offer of $86 per share represents a premium of about 38 percent to Nortek's Tuesday close and implies an equity value of $1.436 billion.
"It's interesting to see that deals still get done despite Brexit," one M&A banker said.
Business valuations may be vulnerable to uncertainty over the impact of Britain's vote to leave the European Union, which lead to a UK recession.
"Melrose is an unusual example of post-Brexit M&A. Only the brave can pull off deals in this environment," the source close to Melrose said.
"Some investors are prepared to take on more risk because they have cash to deploy but it's challenging to find a business proposition that still works. The economic impact of Brexit is still unclear," he said.
Melrose declined to comment on whether Brexit would create opportunities and said its focus would be to improve the Nortek business.
Finance Director Geoffrey Martin said Melrose would consider increasing investment in automation and new machinery for Nortek's manufacturing facilities and seeking complementary acquisitions.
Melrose said the deal would be funded by a rights issue of new shares to raise about 1.6 billion pounds and new debt.
The rights issue has been fully underwritten and is being run by JPMorgan (N:JPM) and Investec (L:INVP). Bank of America Merrill Lynch (N:BAC) served as joint underwriter and joint bookrunner.
Melrose will also reduce the debt burden at Nortek, which had filed for bankruptcy in 2009 to eliminate $1.3 billion in debt. It emerged from Chapter 11 protection in 2010.
Nortek shareholders holding about 68.7 percent collectively have already backed Melrose's offer, which Nortek's board intends to recommend.
Nomura (T:8604) acted as lead adviser for Melrose. JPMorgan and Bank of America also advised Melrose. Barclays (L:BARC) and Citi (N:C) advised Nortek.