GE Buys Smiths Aerospace for $4.8B
Under Jack Welch, General Electric Company became famous for its determination to be #1 or #2 in a field, or get out and focus on areas where it could achieve a commanding position. That aim still drives GE, which is why it’s worth paying attention to GE’s announced purchase of aircraft control & diagnostic systems manufacturer Smiths Aerospace plc for $4.8 billion in cash.
Smiths Aerospace plc was part of the Smiths Group, with more than 11,000 employees in Europe, North America, and Asia; and $2.4 billion in equivalent 2006 revenues. In addition to being a leading supplier of flash-welded rings used in the manufacture of aircraft engines, their key products and services also include flight management systems, airborne platform computing systems, monitoring systems, power generation, conversion and distribution products, actuation products and systems for flight control, thrust reversers and landing gear applications, various engine components, aircraft structural components, land navigation, and a global customer services organization. The company has quietly but firmly built up key positions in these areas, with a significant presence on most commercial aircraft, many military aircraft, and even military land vehicles. See this diagram for a fine overview. More important, Smiths has a firm presence inside new aircraft such as the Boeing 787 Dreamliner and Airbus A380 super-jumbo, the F-35 Lightning II Joint Strike Fighter, P-8 MMA maritime aircraft, Britain’s Future Lynx multi-role helicopter, et. al.
There are still a few Is to be dotted and Ts to be crossed, with completion scheduled for Q2 2007; in the meantime, both firms have plans, and approval is moving through key regulatory bodies…
With respect to the deal and its rationale, Smiths CEO Keith Butler-Wheelhouse had this to say:
“We focus our investment where we can take leading positions in growth markets. This has certainly been true in Aerospace. Over the past five years, we have invested heavily in aerospace technology… The structure of the aerospace industry is changing, in particular its increased capital requirements and the growing importance of supplier scale, especially as the next generation of large programmes kicks in.
The Board has considered these issues and the opportunities for Smiths going forward and last autumn instigated a thorough process which has led to today’s announcement. By selling Aerospace, we crystallise the value for our shareholders. At the same time, we know that this business is going to a great owner.”
That comment regarding the future structure of the industry, the scale of future investment required even at the component levels, and the required scale for suppliers bears remembering.
Overall Smiths Group plc’s January 12, 2007 release said that with the sale, Smiths Group is expected to generate improved returns on capital and enhanced margins. Their Board has assessed the capital structure of the Company; following the intended post-sale return of GBP 2.1 billion (out of the GBP 2.25 billion sale) in capital to shareholders by means of a B share scheme plus share consolidation, Smiths is expected to have debt ratings of Baa2 and BBB+. They believe the enhanced financial characteristics of the Company will enable a progressive dividend policy, targeting dividend cover of 1.8 times. They also believe the Company will have the required flexibility to execute its strategy whilst maintaining a solid investment grade rating.
Smiths financial advisors in the deal were Evercore Partners Limited, as well as Credit Suisse Securities (Europe) Limited and JPMorgan Cazenove Limited. Brunswick is their PR adviser.
Then there’s the GE view.
GE Chairman and CEO Jeff Immelt said, “Smiths Aerospace is a world-class business and a great extension of our Aviation business. GE and Smiths fit together well because our product offerings are complementary, and because we have similar customers and deep domain expertise in this industry. This acquisition is consistent with our strategy to invest in high-technology infrastructure businesses that deliver strong growth, earnings expansion and higher margins… GE Aviation is growing about 10% a year and this acquisition gives us a technology growth platform that will be accretive to our net income and will deliver immediate and future value for our investors.”
GE Aviation is headquartered in Evendale, OH, USA, with 26,800 employees and $13.2 billion in revenues in 2006. Its products include jet engines for civil and military aircraft, as well as aeroderivative engines for marine applications. GE Aviation also operates a worldwide network of engine services facilities, and is increasingly selling engines on an availability basis.
With this buy, GE Aviation brings a number of associated monitoring and component systems in-house, strengthening its control over all aspects of their engines and also gaining a premium position in embedded monitoring (HUMS) products that can help it deliver on its commitments. This is what GE Aviation President and CEO Scott Donnelly means when he talks about “greater product scope and value to our customers.”
April 30/07: British Minister for Trade, Investment and Foreign Affairs Ian McCartney announces that he has accepted undertakings from GE and Smiths, instead of referring the proposed acquisition of Smiths Aerospace to the Competition Commission. The undertakings address the protection of sensitive information and ensure that the UK maintains certain strategic capabilities unique to Smiths Aerospace. Ministerial release | Copy of undertakings [PDF file].
April 24/07: European Commission approves the proposed acquisition of aerospace division of Smiths Group by General Electric. The Commission carefully examined whether the new GE/Smiths entity would be able to restrict access to key components or key technological input for its downstream aircraft engine rivals; whether the new entity would have the ability or the incentive to discriminate against its downstream competitors in the supply of aircraft engines; whether the new entity would have a detrimental effect on the development of new engines by competitors; and whther there were potential conglomerate issues that might have a negative impact on effective competition.
Obviously, the EC’s particular concern was for Airbus. In all cases, however, the EC found that the merger would not significantly impede competition in the European Economic Area (EEA) or any substantial part of it. More information on the case is available via the EU site.
March 20/07: UK Minister for Trade, Investment and Foreign Affairs triggers European Intervention Notice. Ian McCartney, the has asked the European Commission’s Office of Fair Trading (OFT) to investigate the proposed acquisition by General Electric of Smiths Aerospace and has issued a European Intervention Notice. Article 21(4) of the EC Merger Regulation 139/2004 enables Member States to take appropriate measures to protect legitimate interests and national security is regarded as a legitimate interest. Section 67 of the Enterprise Act 2002 empowers the Secretary of State to intervene in qualifying mergers that are being dealt with under the EC Merger regulation where he is considering appropriate measures to protect legitimate interests, and he believes a public interest consideration specified in that Act is or may be relevant. The OFT is to make its report to DTI Ministers by May 3, 2007.
The proposed acquisition is already being examined on competition grounds by the European Commission.
Jan 17/07: DID: Smiths Group and GE Embark on Billion-Dollar Sensors Joint Venture in another area. The JV between between Smiths Detection and GE Security’s Homeland Protection business will create Smiths GE Detection, owned by Smiths Group (64%) and GE (36%).