The timing and details of GE's deal to acquire Smiths Aerospace may have come as a surprise, but analysts and industry insiders have for some time been predicting that 2007 might be a year in which a new round of consolidation begins, with UK aerospace and defence companies a key target. This $4.8 billion deal could be the start of a flurry of activity.
But before the first step of a process that could dramatically alter the aerospace and defence industrial landscape, GE has some significant regulatory hurdles to jump. The company came a cropper six years ago when it tried to buy Honeywell: it was eventually forced to abandon the deal when it was rejected by European competition authorities. So what makes the US giant believe it will be successful this time?
GE is confident the deal will succeed, where its earlier attempt so dramatically failed, partly because of the more manageable size of its new proposed target. GE also insists Smiths Aerospace's technologies are much more complementary, whereas ownership of Honeywell's product lines, in particular its engines and engines services business, which would have seen the two companies controlling virtually all the regional jet market, threatened to create a dominant position. In any case, the company is entering this deal with its eyes firmly open. "We are confident...but it will require a significant amount of explaining," says GE.
While the European Court of Justice in 2005 upheld the European Commission's decision to block the takeover of Honeywell, its conclusion that the EC had been wrong to assess the deal using "conglomerate leveraging" and "bundling" theories, was seen at the time as the removal of a significant obstacle that would pave the way for more consolidation.
The company points to a different political situation in Europe six years on, and the precedent of "numerous successful acquisitions across the GE company" since, as indications that it may have an easier ride this time.
In fact, the complementary technologies the businesses share are demonstrated by their intention to form a joint venture in the detection sector, in which Smiths will hold a 64% stake. Smiths had initially hoped to buy GE's detection business, but the joint venture was developed as a compromise. The move will give Smiths access to areas of technology pursued by GE in its non-aerospace divisions that can be applied to products including baggage screening. Formation of the joint venture depends on the successful completion of the acquisition of Smiths Aerospace, but in practice is expected to go ahead in around six months' time.
Assuming that the main deal gets the regulatory go-ahead, there will inevitably be some changes to be made. But both companies insist that there are no immediate prospects for a "traditional" restructuring of the business units as a result of the main deal. "We have complementary technologies - we don't build exactly the same product," says GE, but it adds that, as far as more limited reorganisation of how the business operates goes, "that part of the script hasn't been written yet".
While it is early days, Smiths Aerospace says it is a positive move that will allow it to exploit revenue and cost synergies and improve operations and make supply chain savings for both businesses.
"This is a growth position for Smiths Aerospace and GE Aviation and will expand both companies' capabilities," says Smiths. "Smiths' expertise and knowledge will be key in the continuing growth of the business. Integration planning is at a very early stage and many programmes such as 787, A380 and JSF are ramping up," the company adds.
The move has been greeted with cautious optimism by GE's and Smiths' customers and partners in the industry. "We'd like to understand exactly what this means to us," says Airbus executive vice-president programmes Tom Williams. "There are some assurances we would like to have," he adds.
At a group level, Smiths is divesting a business unit that produced lower margins than the rest of the group and that requires high levels of investment in research and development and has significant exposure to the weak US dollar, according to one analyst.
He predicts the disposal of aerospace, for $4.8 billion, and a multiple of 13.8 times earnings before interest and tax - well above estimated valuations - will pave the way for more breaking up of the group, with the medical equipment arm expected to be next to go. Smiths shares traded up 10% on the London Stock Exchange as news of the deal broke.
Meanwhile, the move is seen by many as the first in a string of deals that will make 2007 the year of consolidation, with UK aerospace and defence businesses at the top of the industry's shopping list. Cobham, Meggitt and Ultra Electronics were the main three companies around which takeover speculation centred before the GE announcement, and the deal is set to increase the buzz.
If the deal clears its regulatory hurdles, it is likely to inspire confidence among potential buyers and pave the way for more consolidation in aerospace.
Source: Flight International
