General Electric (NYSE:GE) is expected to make an offer to acquire the Italian aerospace company Avio for 3 billion euros, or $3.9 billion, in an attempt to strengthen its commercial jet engine division. As The New York Times reported, a source with knowledge of the discussions said that GE and Avio’s majority stake holder, the private equity firm Cinven, will likely cement the deal this week.
Why is GE Interested in Avio?
“Avio is a natural fit in G.E.’s portfolio,” wrote the Times on Tuesday. “The two companies have had a relationship since the 1960s. The Italian jet parts manufacturer currently works with G.E. on a number of major projects, including an engine for the Boeing 787 Dreamliner and one for the Boeing 777.”
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The Italian company would also bring a significant revenue stream to GE’s balance sheet; in 2011, Avio pulled in revenue of more than 2 billion euros, and the company’s space division, which is valued at an estimated 200 to 300 million euros, would likely be sold.
However, the transaction faces a minor hurdle. The transaction will require the approval of the Italian government, which could be stalled by Mario Monti’s decision to resign as prime minister. Over the summer, legislation was passed that gave the government powers to oversee certain sectors, such as defense. Furthermore, the government regards Avio as a strategic asset and could be “reluctant to let it fall into foreign hands.”
Cinven bought a majority stake in Avio in 2006 for $3.3 billion.
CHEAT SHEET Analysis: Is This Deal a Positive Catalyst for GE’s Stock?
One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. In this case, acquiring Avio will give GE greater control of its supply line, the ability to lower its expenses, and greater control over the manufacturing of key products. As the industrial conglomerate prepares for an increase in manufacturing to meet a record number of orders for new engines, it “is seeking to strengthen its supply chain, in part by bringing the manufacturing of some parts in-house,” according to The Wall Street Journal.
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