GKN to buy aerospace arm at Volvo for £663m

GKN HAS agreed to buy Volvo’s aerospace division for £663 million (€831 million) in cash, sealing a deal it has been favoured to win since March.

Volvo Aero, which makes parts for aircraft engine turbines, will help the London-listed engineering group to benefit from global growth in airlines’ aircraft orders, boosting its exposure to civil aerospace from 60 per cent of aviation-related sales to 70 per cent.

The deal will be funded by debt and a £140 million share placing, which represents 5 per cent of GKN’s market capitalisation.

The company’s share price had fallen since it emerged as the leading contender for Volvo Aero, on concerns over a share sale funding the purchase. But Oriel analysts last month estimated a £700 million deal paid with a placing of 10 per cent of shares would be earnings neutral in the first year.

The shares rose nearly 10 per cent yesterday to 205p following the confirmation of the deal.

GKN said the purchase price included equity of 5.6 billion Swedish kroner, £50 million of debt associated with a pension settlement and £70 million in working capital, valuing the division’s equity and debt at 6.3 times earnings before interest, tax, deprecation and amortisation.

Nigel Stein, chief executive, said that he expected the business to achieve GKN’s target margins of 11 to 13 per cent and to be earnings-accretive in the first year. The acquisition is expected to be completed in the third quarter, subject to regulatory approvals.

Mr Stein added the mix of debt and equity to fund the deal was “the right balance”. “We think it leaves us very sensibly positioned,” he said, adding GKN would now take a break from acquisitions – following three in the past year – as it paid down debt.

GKN is one of the world’s biggest makers of structures used in aircraft manufacture, but does not produce the advanced engine parts Volvo Aero specialises in.

The group’s aerospace business – where underlying sales rose 9 per cent in the first five months of the year – will contribute about 37 per cent of group profits following completion of the deal.

Volvo Aero is and based in the Swedish city of Trollhättan. It employs 3,000, with operations in Sweden, Norway and the US.