Content area
Full Text
By Calvin Biesecker
Wall Street analysts are generally applauding General Electric's [GE] proposed $4.8 billion cash deal for the Aerospace division of Britain's Smiths Group, despite the relatively high price versus future earnings given that GE will have an opportunity to improve profit margins in the Smiths business while expanding its offerings in the aviation sector.
"This aerospace transaction had been talked about for years in the aerospace industry and, in our view, makes good sense," Bear Stearns analysts said yesterday. Morgan Stanley analysts agreed, citing the strategic importance and the "ample room for margin improvement to justify the rather healthy premium."
GE Aviation touts margins of about 20 percent compared to Smiths Aerospace's 11 percent.
A sidebar to the pending deal, which the companies expect to close toward the end of the second quarter, is the establishment of a joint venture between Smiths' and GE's respective detection and homeland security businesses. The creation of Smiths GE Detection, comprised of 64 percent ownership by Smiths and 36 percent by GE, is contingent upon closing the aerospace agreement.
GE's aerospace business, which is mainly based on the development and production of engines for commercial and military aircraft, has been looking for a while to "move beyond the engine," as company officials say. The company made a failed attempt to purchase Honeywell [HON] for $45 billion in 2001 after European Union (EU) anti-trust regulators nixed the deal citing reduced competition in the aerospace industry that would result from the merger. Honeywell also makes engines for small aircraft and helicopters.
Most analysts believe the acquisition of Smiths Aerospace is unlikely to be turned down by EU authorities given it has fewer aerospace revenues than Honeywell and that the deal is complementary for GE, meaning there is little overlap between both companies' product portfolios. However, UBS analysts wouldn't rule out an anti- trust investigation by the EU, noting regulators' concerns that the Honeywell deal would have allowed GE to bundle its engine and avionics offerings to "gain an advantage against other competitors."
GE Chairman and CEO Jeff Immelt said he doesn't foresee...