GKN Plc (GKN), a British maker of aircraft components for Airbus SAS, is looking to close a deal to buy Volvo AB (VOLVB)’s aircraft-engine unit in the next month, two people familiar with the situation said.
GKN is the remaining bidder for Volvo Aero as other potential buyers have dropped out, said the people, who declined to be identified as the talks are private. Volvo and GKN aim to sign a preliminary agreement in about two weeks, with a final deal to close the purchase coming a couple of weeks later, one of the people said.
GKN initially bid about 800 million pounds ($1.28 billion) for Aero, a price that depends on Volvo meeting certain conditions, the people said. The final price is likely to be slightly lower, they said. Marten Wikforss, a Volvo spokesman, and Andrew Lorenz, a GKN spokesman, declined to comment.
Volvo said in November it would sell the aero-engine unit to focus on heavy trucks and construction equipment in the Gothenburg, Sweden-based company’s biggest structural shift since splitting off its car division a decade ago. The Volvo Aero unit equips aircraft such as Saab AB (SAABB)’s Gripen fighter jet.
GKN and other competitors are looking to broaden their offerings as defense budgets decline in Europe and the U.S. In the U.K., Prime Minister David Cameron’s government is in the midst of plans to trim defense spending by 8 percent over four years, while Germany last year ordered cumulative savings of 3.3 billion euros ($4.4 billion) in its military budget by 2013.
GKN dropped 2.20 pence, or 1 percent, to 211.60 pence at the close of trading in London today. Volvo rose 0.2 percent to 97.40 kronor in Stockholm.
Companies that had been interested and dropped out include German aircraft-engine maker MTU Aero Engines Holding AG (MTX) and buyout firms Carlyle Group LP (CG:US) and Nordic Capital.
The asset would allow GKN to further broaden its offering after Chief Executive Officer Nigel Stein called 2011 a “year of transition” for the aerospace division, with an accelerating civil aviation market countering lower military orders.
Stein said Feb. 28 that he will remain disciplined on what he would pay for acquisitions and that Redditch, England-based GKN has looked “at a lot of things over the years.”
GKN has four divisions, of which aerospace is the second- largest by revenue. The aerospace business increased sales 4 percent to 1.48 billion pounds in 2011, lagging underlying revenue growth at the other three divisions.
In addition to complete engines, Volvo’s aero-engine unit makes components including compressor rotors, turbine structures and fan cases. The division’s operating profit fell to 151 million kronor ($22.7 million) in the fourth quarter from 282 million kronor a year earlier. Sales increased 1 percent.
The Swedish truckmaker has been active in aviation systems since the 1940s. The business traces its roots to a Swedish Air Force order for 40 aircraft engines placed with a locomotive manufacturer in 1930, according to Volvo Aero’s website.
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