MILAN General Electric Co (GE.N) has agreed to buy the aviation business of Italy's Avio for $4.3 billion, in a sign of confidence about the country's underlying strength despite its deep recession.
The deal comes as Europe's fourth-biggest economy labors to become more competitive under a reform agenda set by technocrat prime minister Mario Monti, who is due to step down on Friday before general elections seen in February.
"We are convinced that Italy will exit the crisis," Nani Beccalli, president and chief executive of GE Europe, told reporters on Friday. "There are undoubtedly hurdles linked to red tape. But the strategic value of the deal is so big (it would offset other issues)", Beccalli said.
GE agreed to buy Avio from private equity fund Cinven and Italian state-controlled defense group Finmeccanica SIFI.MI. The move frustrated the aspirations of France's Safran (SAF.PA) and Italy's state-backed Strategic Fund, which had been trying over the last few months to take over Avio.
GE, whose businesses range from infrastructure technology to financial services, said Avio would boost its global supply chain capabilities as its engine production rates rise to meet growing customer demand.
Avio, which makes components for the GE Dreamliner engine used by Boeing Co (BA.N), ranks among Italy's industrial jewels and is one of the most technologically advanced companies in its field.
William Blair & Co analyst Nick Heymann said the move, which amounts to GE buying a supplier to its jet engine program, was intended in part to protect new technologies.
"They're trying to get more vertically integrated and have more control over critical aspects of the manufacturing process," he said.
GE is developing composite ceramics for jet engines, a technology it also plans to use in other products such as electric turbines and equipment used in oil and gas production.
"Rather than developing (composite ceramics) and trust someone not to give it away, you want to keep it in-house," Heymann said.
The move could be a sign that GE in coming years might be ready to consider larger acquisitions outside of the $1 billion to $3 billion range that GE's CEO, Jeff Immelt, has described as the company's sweet spot over the past few years.
"We're slowly inching our way back into larger capital redeployment," Heymann said.
GE shares were down 0.6 percent at $20.92 on Friday morning on the New York Stock Exchange.
GE said the purchase price values the aviation business of Avio, which also supplies Rolls Royce Holdings (RR.L), at 8.5 times its expected 2012 core earnings before interest, taxes, depreciation and amortization.
"No nitpicks here. This is an excellent deal," said Brian Langenberg, of independent research firm Langenberg & Co.
Debt-laden Finmeccanica, which owned 14 pct of Avio, will use the 260 million euros it is earning from its stake sale to lower debt. The sale is the first of a number of disposals the company needs to carry out to keep its investment-grade credit rating.
The U.S. group will not be buying Avio's space unit, which the Italian government considers strategic. The unit, which is expected to make sales of between 280 million euros and 285 million in 2012, will remain for the time being under the control of Cinven and Finmeccanica.
Avio's revenue in the aviation sector was 1.7 billion euros ($2.25 billion) in 2011, with more than 50 percent derived from components for GE and GE joint-venture engines.
Cinven had bought Avio in 2006 for some 2.6 billion euros.
Under GE's ownership, Avio will invest 1.1 billion euros over the next 10 years, company executives said.
GE said it planned to pursue new opportunities for Avio in the power generation, oil and marine products industries.
The GE deal comes after a planned initial public offering for Avio was scrapped earlier in 2012 because of weak market conditions.
(Additional reporting by Krishna Das in Bangalore, Massimo Gaia in Milan and Scott Malone in Boston; writing by Lisa Jucca; editing by David Holmes and Matthew Lewis)