Bloomberg News

GKN to Buy Volvo’s Aerospace Division for $987 Million

July 05, 2012

GKN Said to Purchase Volvo’s Aerospace Division for $1.1 Billion

GKN initially bid about 800 million pounds for Aero, which equips aircraft such as Saab AB ’s Gripen fighter jet, a price that depended on Volvo meeting certain conditions, people familiar with the situation said March 27. Source: Volvo Aero via Bloomberg

GKN Plc (GKN), a U.K. maker of parts for Airbus SAS jetliners, agreed to buy the aircraft-engine unit of Volvo AB (VOLVB) for 633 million pounds ($987 million) to add lighter components and narrow the gap to rivals such as Safran SA. (SAF)

The British company, which also makes automotive parts, plans to raise 140 million pounds in a share sale to help pay for the purchase of Volvo Aero, it said today in a statement. The stock rose as much as 13 percent, the most in three years.

GKN is broadening a product range that already includes some engine components as airliner orders accelerate, with the deal taking aerospace sales to about 37 percent of the total, Chief Executive Officer Nigel Stein said on a conference call. For Volvo, the second-biggest truckmaker, the disposal marks the biggest structural shift since its car unit was sold in 1999.

“This takes GKN into some new areas and increases the aerospace percentage,” said Nick Cunningham, an aviation analyst at Agency Partners in London. “It also raises the question of whether GKN is in the process of repositioning itself and will eventually become almost a pure aerospace company.”

GKN traded 12 percent higher at 209.7 pence as of 10:07 a.m. in London, taking gains this year to 15 percent and valuing the Redditch, England-based company at 3.27 billion pounds.

Gothenburg-based Volvo was up 1.2 percent at 82.55 kronor in Stockholm and is valued at 176 billion kronor ($25 billion).

A320 Boost

GKN is paying 6.3 times operating profit at the Aero unit, which employs 3,000 people in Sweden, Norway and the U.S., and has been pursuing the acquisition for two or three years, Stein said, adding that the whole of the business will be retained.

Any other acquisitions will be put on hold until the company has paid down debt, though there is no intent to expand in aviation components at the expense of other areas, he said.

The takeover will create an aerospace unit with more than 2 billion pounds in revenue, making GKN one of the world’s top 10 tier-one suppliers. About 70 percent of sales will come from passenger plane programs such as Airbus’s A320 single-aisle family, for which Volvo Aero supplies engine components.

GKN initially bid about 800 million pounds for Aero, which equips aircraft such as Saab AB (SAABB)’s Gripen fighter jet, a price that depended on Volvo meeting certain conditions, people familiar with the situation said March 27.

MTU, Carlyle

Companies that had been interested and dropped out earlier this year include German aircraft-engine maker MTU Aero Engines Holding AG (MTX) and buyout firms Carlyle Group LP (CG:US) and Nordic Capital.

Stein said Feb. 28 that he would remain disciplined on what he would pay for acquisitions and that GKN had looked at “a lot of things over the years.” The company has four units, of which aerospace is the second largest after sales grew 4 percent last year to 1.48 billion pounds, lagging behind the other divisions.

In addition to complete engines, Volvo Aero makes parts including compressor rotors, turbine structures and fan cases. GKN Aerospace will get about 40 percent of its sales from engine activities following the takeover, up from 14 percent last year, helping to rebalance the business, Stein said today.

The acquisition continues a trend toward consolidation among aerospace companies as prime contractors seek suppliers able to become risk-sharing partners on big-ticket programs.

GKN was already a top-tier Airbus and Boeing supplier after its 169 million-pound purchase of the European planemaker’s Filton factory, near Bristol, England, in 2009.

GE, Rolls

Adding Aero should give GKN a similar status with engine makers General Electric Co. (GE:US), Rolls-Royce Holdings Plc (RR/) and Pratt & Whitney, enabling it to compete with Paris-based Safran SA and MTU, with which it will also have closer ties on some programs.

One large engine maker, Avio SpA, remains in play. Italy last month approved plans for an initial public offering of a company 81 percent owned by private-equity firm Cinven Ltd. after defense contractor Finmeccanica SpA agreed to sell its stake to national investment fund Fondo Strategico Italiano SpA.

The Volvo deal means GKN will be involved in all major new aircraft engine programs, though there is scope to strengthen its position on the Leap model from the CFM International venture of GE and Safran, said Marcus Bryson, who heads the aerospace division. The engine is available on both Airbus’s A320neo and the competing Boeing Co. 737 MAX.

Truckmaker Volvo has been active in aviation systems since the 1940s, though the business traces its roots to a Swedish Air Force order for 40 engines placed with a locomotive manufacturer in 1930. The company also makes construction equipment.

The Aero unit is based in Trollhaettan, 80 miles north of Gothenburg and also home to Saab Automobile, the bankrupt carmaker that last month was sold to a Chinese-Japanese investment group that aims to make electric cars.

GKN was advised by JP Morgan, UPS and Gleacher Shacklock. Volvo declined to identify its advisers.

The GKN share sale, equal to 5 percent of its market value as of yesterday’s close, is fully underwritten, the company said, with UBS and JP Morgan acting as joint book-runners.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net


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