General Electric Co. (GE:US), the biggest maker of jet engines, agreed to buy the aerospace-parts business of Avio SpA for $4.3 billion, tightening control over its supply chain as planemakers boost output.
The purchase from Cinven Ltd. and Finmeccanica SpA values Turin-based Avio at 8.5 times estimated earnings for 2012 before interest, tax, depreciation and amortization, according to GE, which won’t be acquiring the Italian company’s space assets.
GE is adding Avio after forming a partnership with Mitsui & Co. in October and another with Parker Hannifin Corp. last month in moves focused on securing components for the company’s next- generation commercial engines. The acquisition is the largest in the aerospace industry for GE since it bought parts of Smiths Group Plc for $4.8 billion in May 2007, according to data compiled by Bloomberg.
“By acquiring part of their supply chain it will be easier for them to manage the production ramp-up and help reassure the aircraft makers,” said Yan Derocles, an aerospace analyst at Oddo Securities in Paris.
Avio’s aviation business had sales of 1.7 billion euros ($2.2 billion) last year, versus 297 million euros at the space division, the prime contractor on the European Vega launcher, for which Cinven and minority investor Finmeccanica said they plan to seek industrial alliances.
Fairfield, Connecticut-based GE beat offers for Avio from Safran SA (SAF), CVC Capital Partners Ltd. and Clessidra SGR SpA, people with knowledge of the negotiations have said. The deal is subject to regulatory and governmental approvals.
“This acquisition is a great strategic fit with our existing portfolio,” David Joyce, head of the GE Aviation division, said in the statement.
GE will invest $1.1 billion in Avio over the next 10 years, Joyce said at a press conference in Milan after the purchase was announced.
GE fell (GE:US) 0.8 percent to $20.88 at the close in New York. The shares have gained 17 percent this year, compared with a 14 percent advance for the Standard & Poor’s 500 index.
Avio gets more than 50 percent of sales from GE and GE joint-venture engines. It makes parts for the U.S. company’s newest model, the GEnx, which powers Boeing Co. (BA:US)’s 787 Dreamliner and 747-8 jumbo jet, and is a supplier to CFM International SA, a venture of GE and Safran that’s the exclusive source of engines for the Boeing 737, the world’s most widely flown passenger jet.
Boeing plans to ramp up production by 60 percent in the four years through 2014 as it works through a $307 billion order backlog. Airbus SAS said last month it will take seven years to build the 4,400 planes its customers have on order.
GE said the acquisition will also create opportunities to offer Avio products and services beyond the aviation industry, with prospects for expansion in power generation, oil and marine products.
Avio employs about 5,300 people, 4,500 of them in Italy, including 800 at the space unit.
“The space business is going to have to go somewhere,” said Thomas Picherit, a Paris-based analyst at Alphavalue SAS. “They may have to sell at some kind of a discount.”
Founded as the aeronautics unit of Italian carmaker Fiat SpA in 1908, Avio was purchased by Carlyle Group LP and Finmeccanica (FNC) in 2003 before being sold to Cinven in 2006 in a deal that valued it at about 2.6 billion euros.
The buyout firm began preparing Avio for a sale last year when it hired banks to manage an initial public offering. The IPO was postponed amid stock-market swings, after London-based Cinven received approaches from suitors including Safran.
Today’s purchase follows Cinven’s rejection of an offer from private-equity firms CVC and Clessidra, which bid about 3 billion euros, people familiar with the situation have said.
Finmeccanica, Italy’s biggest defense company, said today it will retain its 14.3 percent stake in Avio.
Cinven was advised by JPMorgan Chase & Co. and Rothschild. Avio worked with Deutsche Bank AG, Banca IMI SpA, Morgan Stanley and Barclays Plc. GE was advised by Credit Suisse Group AG.
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