British buyout for Volvo aerospace?

AFP

World number two truck maker Volvo and GKN are likely to unveil a deal this month for the British engineering group to buy Volvo's aerospace division, two sources with knowledge of the matter told Reuters.

Volvo Aero would boost the capacity and range of GKN's engine component portfolio as demand in the commercial aerospace segment continues to grow.

The unit would also give GKN a higher proportion of sales to the civil aircraft industry at a time when many Western governments are slashing defence spending to rein in budget deficits.

GKN and Sweden's Volvo declined to comment. The sources declined to be identified because they had not been authorised to speak publicly about the deal.

One of the sources said a deal could be reached during the first half of July.

Volvo Aero had sales of 6.5 billion Swedish crowns ($938 million) in 2011. GKN Aerospace had sales of 1.48 billion pounds ($2.3 billion) last year, with 42 percent to military applications. Military business accounts for only 5 percent of Volvo Aero's sales.

In terms of total sales, GKN, which is also a supplier to the automotive industry, is 10 times bigger than Volvo Aero.

GKN's aerospace unit, which makes airframes for Airbus and Boeing, expects to grow strongly in 2012 now deliveries of Boeing's new 787 - in which GKN is heavily involved - have started, while production of the Airbus A350 has also kicked off.

“The strategic importance of developing a greater presence in an industry underpinned by the need for 33,500 aircraft to be delivered by 2030 worth $4,060 billion between 2011 and 2030 is significant,” said analysts at Oriel, who value Volvo Aero at around 700 million pounds.

GKN's aerospace unit delivered a 13 percent rise in first-quarter profit, helped by the ramp-up of civil aerospace programmes, which have offset falling military sales.

Volvo said in November last year it had begun talks with prospective buyers to sell the unit to focus on commercial vehicles.

One banker not directly involved in the talks said GKN was mainly interested in Volvo Aero's engine components business but that Volvo wanted to sell the whole division in one go, including its military and space units.

“I think talks around these issues have held things up since March,” the banker said.

GKN had been tipped as a frontrunner to buy the business, according to media reports starting in March. Investor concern of a share issue to fund part of the deal has since weighed on GKN shares.

“The 700 million pounds that has been talked about is clearly seen as a hefty price by shareholders, because the GKN share price took a hit when it emerged the pair were in talks,” the banker added. -Reuters