General Electric to Buy UK's Smiths Aerospace Unit

Posted 15 January 2007 @ 04:52 pm EET     Print     Reprint     E-Mail     Comments

LONDON (Reuters) - General Electric (GE) has agreed to buy the aerospace business of Britain's Smiths Group Plc for $4.8 billion cash as it seeks to capitalize on a flood of new plane orders and robust U.S. military spending.

The two firms said on Monday they had also agreed to set up a joint venture for their detection and security businesses, to be owned 64 percent by Smiths and 36 percent by GE. The deals are the latest in a string from GE as the world's second-biggest company by market value looks to tap fast-growing, hi-tech markets to offset a weaker performance at its traditional industrial businesses.

Smiths, a conglomerate long tipped by analysts for break-up, said it planned to return 2.1 billion pounds ($4.1 billion) to shareholders from the aerospace sale. Its shares surged as much as 17 percent to a new high of 1,155 pence, and fellow British aerospace companies also rose, as analysts said GE had paid a handsome price.

"The read-across is that the prime mid-cap aerospace plays are now trading at a 26 percent discount to the price paid by GE they are Meggitt (MGGT.L), Cobham (COB.L) and Ultra (Electronics) (ULE.L), which would all be attractive to a large U.S. predator," Numis analysts wrote in a research note.

At 1331 GMT, Smiths' shares were up 13.6 percent at 1,119 pence, topping the benchmark FTSE-100 index. Meggitt rose 4.5 percent to 338-1/4p, Cobham 3.2 percent to 208-1/4p and Ultra Electronics 1 percent to 1,155 pence.

Ratings agency Moody's Investors Service cut Smiths' credit rating two notches to Baa2, the second-lowest level of investment grade, saying its cash generation would fall relative to net debt. Five-year credit default swaps on Smiths rose 7 basis points to 30 basis points, a trader said, adding that speculation that the deal could prove a precursor to a full sell-out to GE helped limit the move.

RISKY INDUSTRY

"We have had a long-term commitment to improve the technology base of the company and to invest in fast growth, hi-tech sectors," GE Chairman and Chief Executive Jeff Immelt told reporters on a conference call. "This (deal) is very consistent with long-term strategy of the company."

The aerospace industry is benefiting from strong plane orders amid major new projects from manufacturers such as Airbus (EAD.PA), with its A380 superjumbo, and Boeing, with its mid-sized 787.

Smiths is supplying both, as well as Lockheed Martin Corp's F-35 Joint Strike Fighter. But development costs are high, and Smiths Chief Executive Keith Butler-Wheelhouse told reporters this had led his board to consider whether the time had come to exit.

"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 programs kicks in," he said in a statement.

Sale of aerospace means loss of a business that generated 37 percent of Smiths turnover 1.3 billion pounds in the year to last July but one that generates lower margins than the detection business in which Smiths now plans to join forces. "We believe that Smiths' other businesses could be targeted by other companies," UBS analysts wrote in a research note.

But others said Smiths would not have signed the detection joint venture letter of intent with GE unless it planned to go it alone.
Butler-Wheelhouse said Smiths had expressed an interest in buying GE's detection business, but had been rebuffed and had instead agreed to a joint venture arrangement, with the British firm in the lead.

A source familiar with the matter said both private equity and existing aerospace firms had expressed interest in Smiths' aerospace unit during the auction process, and that Smiths had no plan to sell its medical-equipment business. JP Morgan analysts said GE was paying an enterprise value of 14.8 times its 2007 operating profit forecast for Smiths' aerospace business, above its forecast stand-alone value for the unit of 11 to 12 times.

Smiths said it hoped to complete the deal by the end of June and planned to return cash to shareholders through a B shares scheme and share consolidation. The deal would boost earnings per share and also enable a more progressive dividend policy, it added.

The deal is conditional on European and U.S. regulatory approval and backing from Smiths' shareholders.
Evercore Partners, Credit Suisse and JPMorgan Cazenove acted as financial advisers and brokers to Smiths.