The combination of Volvo Aero with GKN's own aerospace division creates a business with pro forma 2011 sales in excess of £2 billion ($3.1 billion), of which about two-thirds would have been in the civil aerospace market.
GKN said the deal will bring together GKN Aerospace's leadership in composites and Volvo Aero's strength in metallic technology, to pull in customers focused on lightweight, high-performance engines.
"This is a highly attractive acquisition for GKN, creating a market leader in aero engine components," GKN chief executive Nigel Stein said in a statement.
The purchase comes at a time when civil aircraft manufacturers are expected to ramp up construction of new planes and engine sales are likely to increase, following a boom in commercial aircraft orders in 2011. As a result, analysts expect original equipment manufacturers such as Boeing Co. and Airbus SAS and engine suppliers such as the joint venture between General Electric Co. and Safran SA, Rolls Royce plc and Pratt & Whitney to be forced to boost their supply chains and work more closely with suppliers such as GKN Aerospace and Volvo Aero.
"The aerospace industry is now faced with having to deliver a huge backlog," business advisory firm AlixPartners LLP said in a new study of the aerospace and defense industry released Thursday. "The industry must increase production rates by 45% in volume by 2015 if it is to meet demand, representing the industry's biggest challenge in the coming years."
GKN said the Skr6.9 billion price tag includes an equity consideration of Skr5.6 billion, together with an anticipated Volvo Aero pension settlement of £50 million and a £75 million refinancing of working capital.
In 2013, the first full year of ownership, Redditch, England-based GKN said the transaction is expected to be enhancing to its earnings per share and to generate a return on invested capital that exceeds the group's pretax weighted average cost of capital of 12%.
The buyer expects to fund the acquisition with debt and a £140 million share placement with institutional investors, representing about 5% of GKN's current market capitalization. In a separate announcement Thursday, it said the fully underwritten, non-pre-emptive cash placing would go ahead even if the Volvo Aero deal does not close. JPMorgan Securities Ltd. and UBS are acting as joint bookrunners.
Volvo, of Gothenburg, Sweden, put the unit up for sale in November as part of a strategic refocus on heavy commercial vehicles. The auction initially attracted interest from both trade buyers including MTU Aero Engines Holding AG and private equity investors, reportedly including Carlyle Group and Nordic Capital. However, by the end of March, most of those had dropped out, and GKN was reported to be the front-runner.
Volvo said the sale would reduce the group's debt by about Skr5 billion and improve its third-quarter profit by about Skr200 million. The profit figure, which assumes the deal will be completed by the end of August, includes a capital gain of Skr400 million, minus deferred depreciation of assets of about Skr200 million.
Volvo Aero, based in Trollhättan, makes complete engines, subassemblies and aerospace components. It supplies engines and equipment to Saab AB's Gripen fighter aircraft as well as all the major aero engine manufacturers, and it has positions on most major civil aerospace platforms.
In 2011 Volvo Aero generated sales of Skr6.5 billion and Ebitda of Skr800 million and had gross assets of Skr9.3 billion. GKN expects Volvo Aero's 2012 sales to be around Skr7.3 billion, with Ebitda of about Skr1.1 billion. The acquisition enterprise value equates to an expected 2012 sales multiple of 0.9 times and an expected Volvo Aero 2012 Ebitda multiple of 6.3 times.
GKN received legal counsel from a Clifford Chance LLP team led by Tim Lewis and including Lee Coney, Amanda Keelan and Richard Sharples.
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