Lately, there has been a steady flow of listed UK engineering companies falling prey to takeovers from US-based competitors.

Over the past 12 months, Spectris and Dowlais (DWL) have followed a similar path to the likes of Ultra Electronics and Cobham in recent years by succumbing to a bid from a US company.

It made for a refreshing change, then, when Rosebank Industries (ROSE) announced the $1.9bn (£1.4bn) takeover of Electrical Components International (ECI) from private equity firm Cerberus in June.

As takeovers go, this was an eye-catching approach, not only because it was a reversal of the regular state of affairs, but because Rosebank was essentially a cash shell, having raised $50mn on its stock market debut less than a year earlier.

Yet the company’s management has a strong enough record of turning around underperforming industrial businesses for investors to agree to stump up £1.14bn to fund the buyout. Rosebank increased its share count around 20-fold, selling 380mn new shares at 300p each. It also borrowed $900mn of debt.

The faith placed in Rosebank is down to the past achievements of chief executive Simon Peckham and senior independent director Christopher Miller who, together with the now-retired David Roper, floated Melrose (MRO) on Aim in 2003 and achieved a total shareholder return of 3,396 per cent by the time they stepped down from the company in March 2024. Over the same period, the FTSE 100 returned a mere 209 per cent.

Familiar faces

Peckham and Miller have brought several other former Melrose team members to Rosebank, including finance director Matt Richards, North American head Jim Slattery and transactions chief Joff Crawford – each of whom were at Melrose for more than a decade before their switch.

Their intention is to recreate the ‘buy, improve, sell’ model they developed at Melrose, under which they bought six businesses. Of the five they sold, the average return was 2.5 times equity, according to company documents.

The sixth business, GKN, proved more challenging. The Melrose team paid £8.1bn in 2018 for a business that principally served the automotive and aerospace industries, both of which then faced crises as Covid-19 hit.

Five years later, with few signs on the horizon that the purchase would deliver anything like the type of returns achieved on previous deals, the automotive arm was spun out in April 2023 as Dowlais, and Melrose became a pure-play listed aerospace engineering business. Peckham et al exited a year later to start again as Rosebank.

Using the market capitalisation of both companies on the date of their departure in March 2024 (when Melrose was worth £8.4bn and Dowlais £1.2bn), Rosebank’s management said their actions had created “an initial £2.9bn of shareholder value” from the GKN deal, including returns through buybacks.

However, those who bought in expecting Melrose to weave the same type of magic on GKN as it had on previous deals will be less happy. Since gaining control of GKN in April 2018, Melrose has generated a total return to shareholders of 25.6 per cent, compared with 81 per cent for the FTSE 100, according to FactSet. And although shareholders were also handed a stake in Dowlais when it was spun out, it too has underperformed. Even after accepting a bid from American Axle & Manufacturing (US:AXL), its shares are worth about 40 per cent less than they were on their debut.

Melrose has also faced anger over the generous rewards that executives have received on hitting certain targets. At last year’s AGM, two-thirds of shareholders voted against the company’s decision to award more than £200mn in bonuses – £57mn of which went to Peckham and £50mn to Miller. These bonuses were granted as part of the resigning directors’ settlement agreements, including the vesting of entitlements agreed under a 2020 incentive plan, Melrose’s management later explained.

Similar incentive structures are in place at Rosebank, with specific classes of incentive shares split among five of the group’s co-founders. In its Aim admission document, the company argued that its incentive scheme has been set up to reward directors only if shareholder value is created, “thereby aligning the interests of management with shareholders”. The co-founders (with friends and family) have also put £15mn of their own money into the business so far, according to Berenberg analysts.

Payouts seem some way off yet, though, and would be well earned if management achieves its aim of doubling shareholders’ investment over a three- to five-year period.

Although Rosebank described ECI in its placing document as the “market leader in critical electrical distribution systems”, it has faced challenges. Over the past 15 years, it has been through a bankruptcy process, then subsequently owned by two funds focused on special situations and distressed debt.

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Shedding debt

While acquisitions have boosted ECI’s scale, a byproduct of that has been a highly levered balance sheet. Net debt had risen to $950mn, or more than five times 2024’s adjusted Ebitda (earnings before interest, tax, depreciation and amortisation) of $189mn, and ECI had a further $100mn of costly factoring and supplier financing deals in place.

At the same time, sales have recently been under pressure – in 2024, they fell by more than 7 per cent to $1.25bn.

Rosebank has therefore used $400mn of the capital raised to cut leverage to three times Ebitda and exited the factoring and supplier financing deals. It aims to maintain a leverage range of between 2.5 and three times cash profit, which should halve debt servicing costs.

It is also injecting $150mn over three years, according to analysts. Some $80mn has been allocated to a two-year restructuring, which management has said will lift adjusted operating profit by about $30mn.

This is already under way, with a duplicate head office in St Louis closed in November and 12 of the company’s 39 manufacturing sites expected to be consolidated. It is also migrating production to lower-cost locations.

Alongside the cost cuts, Rosebank is targeting growth through expansion outside North America (where it generates four-fifths of its revenue) and a greater focus on its higher-margin electrical and instrumentation business.

The eventual aim is to lift ECI’s adjusted operating margin by 5 percentage points, from 13 per cent in 2024 to a target of 18 per cent. Working capital optimisation and other measures should also help to eventually boost cash flows, which can be used to fund bolt-on deals.

Management’s experience in handling large-scale restructurings – on both sides of the Atlantic – means brokers are confident that Rosebank can pull off its plan to double shareholder returns from ECI, which explains why the 12-month consensus target is a fifth higher than the current share price.

It is operating in a competitive space, though. Volex (VLX) recently brought in Dave Webster, who ran ECI for 20 years, as its new chair. Volex’s chief financial officer, Jon Boaden, told the IC in November that Webster’s appointment will help to open doors to customers in sectors such as wiring for domestic appliances and off-highway vehicles, where it is targeting US growth.

Rosebank has indicated it is unwilling to get into a fight for volumes. Its preference is for pricing discipline and new contracts featuring inflation recovery clauses and minimum gross margin acceptance levels.

Moreover, building sustainable cash flows will take time. And since ECI is Rosebank’s first deal, there is a chance that investors could be asked to fund another. In a November trading update, Peckham said management was “looking into a number of other opportunities”.

On its stock market debut, the company told investors that it planned to target industrial companies valued at up to $3bn, so any deal of a similar size to ECI could mean further significant dilution.

Yet for those prepared to ride out the swings, the prospect of the Rosebank team repeating the highs they hit at Melrose could justify the prospect of getting in early.

There are mixed signals for the airline industry’s outlook as 2026 takes off. Passenger growth is still robust in the aftermath of the post-pandemic travel rebound, but supply chain delays continue to stalk the sector. While the International Air Transport Association (IATA) forecasts that global passenger numbers will rise by 4 per cent to 5.2bn this year, it expects the industry’s net margin and return on invested capital to remain flat.

Among European airlines, margin leader Ryanair (IE:RYA) stood out last year with a share price gain of 55 per cent. FTSE 100 group International Consolidated Airlines (IAG) is its closest rival in terms of returns, and the British Airways owner looks undervalued despite its share price rising by 37 per cent in 2025.

After some wobbles last year in the key north Atlantic market, the signs indicate stronger trading ahead at IAG, and this could be a good time to look at the company ahead of an update on capital returns in February and a potential acquisition in Portugal.

Transatlantic trouble

While IAG carries most of its passengers in Europe, transatlantic travel provides the majority of its most profitable routes. The share price has been boosted in recent years by solid demand for premium transatlantic seats.

But north Atlantic weakness was evident last year, as visitor numbers to the US were knocked by geopolitical tensions, immigration policy changes and a six-week government shutdown. European citizen traveller numbers to the US were down in the majority of months in 2025 on a year-on-year basis, and were 5 per cent lower in November, per industry data cited by Bank of America.

In IAG’s third quarter to 30 September 2025, north Atlantic passenger revenue per available seat kilometre (PRASK) fell 7 per cent year on year, as management flagged “softness in US point-of-sale economy leisure”. However, it’s important to note that around half of the decline was due to foreign exchange (FX) movements.

Chief executive Luis Gallego said there had been an “improving [north Atlantic performance] trend with a strong October and November, and we are booked positively”.

“The effect of the ‘liberation day’ [US tariffs announcement] is far away,” he added.

Looking ahead, the men’s football World Cup being held across the US, Canada and Mexico this summer will provide a helpful boost. While there are demand risks to consider from a UK consumer perspective, given an increased unemployment rate and lacklustre economic outlook, the group’s progress with its premium strategy and focus on higher-income customers through BA’s London position and lucrative transatlantic routes softens the potential damage.

On the pricing front, fares are being supported by the constrained outlook for passenger capacity growth. The industry faces a huge plane delivery backlog as aircraft builders Boeing (US:BA) and Airbus (FR:AIR) continue to struggle with engine delivery delays.

In its latest update, IAG confirmed it expected to take delivery of 25 new planes in 2025 (up on last year but lower than in 2023) and guidance is for annual capacity to rise 2.5 per cent. IAG ordered 53 wide-bodied long-haul planes from Boeing and Airbus in the second quarter of last year.

Strong financials

Despite coming in slightly below consensus forecasts, IAG’s third quarter provided some positive signs even as overall PRASK fell by 2.4 per cent. Operating profit was up, while fuel unit costs were down by 11 per cent (non-fuel unit costs were up by 0.2 per cent).

While BA is the jewel in IAG’s crown, the company has a diverse brand portfolio. Its seven operating companies include five airlines. Iberia (which serves Latin America and north Atlantic routes) generates the second-highest amount of operating profit for the group after BA, and until recently covered low-cost carrier Level, which has now become an independent operator within the group. This is followed by Vueling (which operates intra-European routes) and Aer Lingus (north Atlantic). Travel rewards and loyalty schemes business IAG Loyalty generates material profit, and posted better numbers than both Vueling and Aer Lingus in 2024.

The group’s operating margin was 22 per cent in the third quarter, and came in at 15 per cent on an annualised basis.

IAG lags behind Ryanair, its closest European rival, on margins but it is comfortably ahead of continental competitors such as Air France-KLM (FR:AF) and Deutsche Lufthansa (DE:LHA). It is also more profitable than the big US operators American Airlines (US:AAL) and Delta (US:DAL).

Medium-term targets are for a 12-15 per cent operating margin and a 13-16 per cent return on invested capital.

Meanwhile, low leverage supports the continued return of capital to shareholders. Leverage sat at 0.8 times in the third quarter of last year, against a medium-term target of less than 1.8 times through the cycle.

The group completed a €1bn share buyback programme in December and will update the market about the next stage of returns when annual results are released at the end of February. Panmure Liberum analyst Gerald Khoo estimates that the group has headroom to return €9bn (just under half its market cap) over the next two years.

The dividend, reinstated in 2024 after a five-year absence, is expected to grow with inflation this year. Management announced a €220mn interim dividend alongside the third-quarter results, and it plans to return to its historical practice of the interim payout being around 50 per cent of the annual outlay.

Portuguese potential

Capital could potentially be needed for a stake in TAP Air Portugal, the southern European country’s state-owned airline. The company is being partly privatised again, after it was nationalised in 2020, through the sale of a 49.9 per cent stake (5 per cent of this will go to employees). IAG, as well as Air-France KLM and Lufthansa, have expressed interest.

Lufthansa boss Carsten Spohr described TAP as being “of great strategic importance to the European aviation industry”.

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However, noises from IAG indicate that it is much more interested in a full, rather than partial, stake. Group chief financial and sustainability officer Nicholas Cadbury told Bloomberg last month that “we’d need a real clear path to ownership – full ownership or majority ownership – and at the moment that’s not on the table”.

If some sort of stake is taken, it would increase IAG’s exposure to locations in Brazil and south and Central America, as well as destinations in north America, Europe and Africa. In the first nine months of 2025, TAP carried 12.7mn passengers. It generated a pre-tax profit of €68.8mn, down 51 per cent on the prior year as it faced “continued competitive pressures and operational disruptions”, including strikes by Portuguese airport staff.

IAG’s valuation remains undemanding despite the shares having almost trebled since 2022. The group trades on six times forward consensus earnings for 2026, in line with the five-year average but well below Ryanair (14 times) and a slight discount to rival Lufthansa (on seven times).

The shares sit at a double-digit discount to analysts’ consensus target price. Margins are at the top end of guidance and earnings per share growth is expected to exceed 20 per cent when the annual results are disclosed next month, with returns backed up by an attractive brand range and geographical footprint. In short, there is enough momentum behind the group to suggest the shares can take off in 2026.