Smiths Group and GE Embark on Billion-Dollar Sensors Joint Venture

Yesterday, DID covered GE Aerospace’s $4.8 billion acquisition of aircraft control & diagnostic systems manufacturer Smiths Aerospace, and explained the rationale for both sides. Their relationship goes beyond that single transaction, however; on January 16, 2007, Smiths Group and GE also announced that they have signed a letter of intent to create a detection joint venture between Smiths Detection and GE Security’s Homeland Protection business. Smiths GE Detection will be owned by Smiths Group (64%) and GE (36%). The transaction will be subject to approval by Smiths shareowners as well as customary regulatory reviews, and is conditioned on the completion of GE’s acquisition of Smiths Aerospace.

So, what are these firms’ key foci, how do they combine, and how will the new firm be structured?

Smiths Detection is headquartered in London, UK, with about 2,000 employees and $700 million revenues during 2006. The firm is a leading technology developer and manufacturer of sensors that detect and identify explosives, chemical and biological agents, weapons, and contraband. Its advanced technology security solutions also include Smiths Heimann x-ray imaging systems, millimeter-wave technology and a specialist software supply business for the management of large sensor and video surveillance networks. Separate business units focus on related products for the life sciences, and food manufacturing industries.

GE Homeland Protection is headquartered in Newark, CA, with approximately $300 million in revenues during 2006. It is focused on explosives and narcotics detection and has approximately 730 employees located in the U.S., Europe and Asia. It has been part of GE Security, a larger business unit which provides intrusion and fire detection, access and building control, video surveillance, explosives and drug detection, key management and structured wiring solutions.

Stated in those terms, the fit between Smiths Detection and GE Homeland Protection is fairly obvious. Some of Smiths Detection’s technologies and vertical industry foci may also provide logical avenues of cooperation with the rest of GE Security, and Smiths’ CEO believes GE’s substantial technology resources and research capabilities will in turn accelerate new product development. Viewed from the other side, GE CEO Jeffrey Immelt says that their firm continues to believe in the security sector as a great long-term opportunity that’s already experiencing strong growth, and sees the joint venture as a way to enhance their long-term position in the industry.

Smiths and GE will now negotiate a definitive agreement based on the Letter of Intent. The firms have agreed to an undisclosed exclusivity period in which to reach a final agreement, and the Letter of Intent discusses a long-term commitment with no voluntary exit rights for the first 5 years, and no ability for GE to call Smiths interest in Smiths GE Detection except within 30 months of completion of a change of control of Smiths. Following this 30 month period, a change of control event at Smiths would entitle GE to put its Smiths GE Detection interest to Smiths.

Smiths Group will have a majority on the Board, which will be chaired by Smiths CEO Keith Butler-Wheelhouse and will consist of 4 Smiths and 2 GE representatives. Stephen Phipson, currently Group Managing Director of Smiths Detection, will be Smiths GE Detection’s first President if the joint venture goes through.