Shares of General Electric (GE) fell 0.8% in Friday's general dismal trading session, which was dominated by the fiscal cliff discussions which were put on hold. The diversified industrial conglomerate announced that it has agreed to purchase the aviation business of Avio S.p.A.
General Electric announced that it has agreed to acquire the aviation business of Italian-based Avio S.p.A. The company will pay roughly $4.3 billion dollars for the manufacturer of aviation propulsion components and systems for civil and military aircraft.
With the acquisition, GE Aviation has a greater participation in jet propulsion, one of the most attractive sectors in the aviation business, according to the company.
The company which is based in Turin employs roughly 5,300 people, most of which work in Italy.
David Joyce, CEO Of GE Aviation commented on the deal, "We look forward to Avio joining the GE family. We have worked closely with Avio for decades, and we anticipate a bright future together. This acquisition is a great strategic fit with out existing portfolio Avio has technologies, capabilities and outstanding engineers to help grow our business. GE is an excellent corporate citizen in Italy, and we are very excited to grow the relationship."
For the full year of 2011, Avio generated annual revenues of $2.4 billion. The business generates more than 50% of its revenues derived from components for GE and joint ventures with the firm. The deal values the firm at 1.8 times annual revenues and roughly 8.5 times EBITDA for the year of 2012.
Avio is currently in hands of private equity firm Cinven, and aerospace and defense firm Finmeccanica. The deal is subject to regulatory and governmental approval. GE anticipates to close the deal in the middle of 2013.
General Electric ended its third quarter with $8.4 billion in cash and equivalents. This excludes the cash holdings of the financial unit. The industrial division supports $12.1 billion in short and long term borrowings for a net debt position of roughly $3.7 billion.
In the first nine months of 2012, GE has generated total revenues of $108.0 billion on which it earned $9.6 billion. Recently, the firm has lowered its full year revenue growth target to 3%, implying full year revenues of $151 billion. Full year net income is expected to come in around $13 billion.
The market values General Electric at $219 billion. This values the firm at almost 1.5 times annual revenues and 16-17 times annual earnings.
Last week, General Electric announced a 12% hike in its quarterly dividend, now paying $0.19 per share. As such, the company pays an annual dividend yield of 3.6%.
Some Historical Perspective
Year to date, shares of General Electric trade with gains of 16%. Shares steadily rose to highs of $23 in October, but have fallen back to levels around $21 per share at the moment.
Shares of General Electric fell from levels in the forties in 2007 to lows in 2009 when Warren Buffett needed to step in and throw a lifeline to the firm. Shares recovered from lows of $6 during those darkest days, and have tripled from these levels. The company has been trying to gradually wind down its GE Capital business which endangered the future of the firm during the crisis. GE now focuses on the "traditional" businesses including aviation, energy and industrial businesses.
The deal with Avio has been widely expected as rumors about a possible deal surfaced earlier this week.
The deal with Avio S.p.A. will significantly boost General Electric's aviation business. For the first nine months of 2012, the Aviation business generated revenues of $14.5 billion, implying that full year revenues could come in around $20 billion. The deal will add roughly $2.4 billion in annual revenues, boosting the revenues of the unit by some 12%.
The deal will further integrate GE's supply chain capabilities and thereby its position as a key aviation supplier. Avio is a supplier to Boeing's (BA) Dreamliner program. GE will not acquire the space unit which it deemed as not being interesting enough.
GE was furthermore comforted by the reform agenda which was initiated by prime minister Mario Monti. The president which took drastic reform measures decided on Friday to not participate in the coming elections in Italy.
The deal is excellent for selling shareholders Cinven and Finmeccanica. The companies had plans to sell the business in a public listing, valuing the unit at $4 billion.
I think the deal makes perfect sense, although the impact of the deal is rather limited. General Electric knows what they are buying into after working with the business for over two decades. GE will invest another $1.1 billion in the next decade in research and development.
Shares have fallen almost 5% over the past week after the firm announced to boost payments to shareholders. On top of the 3.6% dividend yield, General Electric will buy back up to $15 billion in its own shares.
The valuation has become a little more appealing over the past week. GE pays a fairly high dividend yield, while trading at fair value multiples. Investors are not yet enthusiastic, but I think there is still long term value in the shares. Expect more nice bolt-on acquisitions, as announced on Friday.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.