GKN shares jump after $986 million aerospace buy

LONDON Thu Jul 5, 2012 5:46am EDT

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LONDON (Reuters) - British engineering group GKN Plc (GKN.L) agreed the 633 million pounds ($986 million) purchase of Volvo AB's (VOLVb.ST) aerospace division, expanding its presence in the fast-growing civil aircraft sector and helping send its shares sharply higher.

Confirming a deal which sources with knowledge of the matter had told Reuters would be agreed this month, GKN said it had sought to grow in a sector which is forecast to almost double in size over the next 20 years.

"It will propel GKN into the top 10 independent aerospace ... suppliers," GKN Chief Executive Nigel Stein told reporters on Thursday. "We are already a market leader in aero structures, this makes us a leader in engine components too, a large and growing segment of the aerospace industry."

The deal - and an update on trading which showed underlying sales up 9 percent - propelled GKN shares to their highest since late April. The stock was up 13.2 percent at 211.3 pence by 0914 GMT.

"This is a defining moment for GKN, with aerospace now set to account for 40 percent of earnings," Oriel Securities said in a note, which welcomed the lower-than-expected price and smaller-than-expected placing of shares to fund it.

"The deal has happened a fraction earlier than we anticipated, but a cracking price ... and a placing of just 5 percent (of GKN's existing equity). Our assumption was 700 million pounds and 10 percent."

GKN has been shifting the balance of its aerospace business away from military, where budgets are coming under pressure from governments looking to cut spending.

CEO Stein said however that after a string of acquisitions, there would now be a pause. "We will be looking to generate cash and pay down debt over the next period, so I'm not envisaging rushing out into the market for acquisitions until we have got that debt reduction program going," he said.

For Volvo, the world's number two truck maker, the sale completes an exit from an activity no longer seen as central to its operations.

GOOD DEAL

"Obviously the final purchase price is not quite as much as had been speculated ... but I think for Volvo itself it's a very good deal. It helps the company to divest a non-core part of the group which has been for sale for a while," Morgan Stanley analyst Laura Lembke said.

"The closure of the deal is a clear positive as it is another step in the right direction as Volvo refocuses and streamlines its operations," Lembke said.

Volvo shares were up 1.4 percent at 82.70 crowns.

GKN purchase comprises 513 million pounds for the equity and a anticipated pension settlement of 50 million pounds, plus working capital of 70 million.

The deal will be funded by new debt and a share placing to raise 140 million pounds.

GKN said it had been pursuing Volvo Aero for a number of years and had become closely engaged when Volvo said it was considering selling the business in November.

"(The deal) has been a long time in gestation," Stein said. "We had identified this business four or five years ago as a top strategic target. We have been talking to Volvo Group about whether they would be interested in selling it for two to three years."

He said the acquisition had been drawn out because Volvo Aero's customers, which include General Electric Co (GE.N), Pratt & Whitney (part of United Technologies Corp (UTX.N)) and Rolls-Royce Holdings Plc (RR.L), which are already GKN partners, were kept on board with developments.

Volvo Aero employs 3,000 in Sweden, Norway and the United States. Stein said it was too soon to talk about potential job losses, but he said there were no plans to close any facilities.

The group will also retain Volvo's work for the Swedish military and the country's space program, he said. ($1 = 0.6419 British pounds)

(Editing by David Holmes)

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