General Electric (GE +1.15%) made good on speculation that it would purchase Italian aeronautics firm Avio, announcing that it would buy up the company's non-space assets for €3.3 billion, or about $4.3 billion. Avio is a critical supplier to GE Aviation, deriving over half of its aviation revenue from General Electric. By acquiring the company, GE has consolidated its own supply chain and secured access to valuable technology it can leverage over multiple platforms in a single deal.
A shorter supply chain helps GE Aviation in its effort to ramp up production of some of its most popular engines, a welcome improvement as Boeing (BA +0.89%) and Airbus race to increase their own production. One important platform utilizing Avio components is GE Aviation's GEnx jet engine, which, along with the Rolls-Royce Trent 1000, is one of two engine options for Boeing's best-selling 787 Dreamliner. Boeing wants to triple production of the 787, as it works to deliver an 800-order backlog of Dreamliners worth approximately $180 billion. Boeing has been actively encouraging the consolidation of its components suppliers to speed production. If this deal assists that effort, it's not just good for Boeing, it's also great for Avio and GE Aviation.
In a recent investor meeting, GE CEO Jeff Immelt laid out the criteria GE sought in an acquisition, saying that businesses with valuable technology that could be leveraged into multiple revenue streams were particularly attractive. Avio fits the bill. As a lead provider of high-quality jet propulsion systems, GE has gained a technological advantage over the other two dominant jet engine manufacturers, Rolls-Royce and the Pratt & Whitney division of United Technologies (UTX +4.71%).
Avio's technology, however, can also be applied to new business ventures. For example, jet engine makers, including GE and United Technologies, often apply their expertise in gas turbines to produce industrial power generators. GE plans to use Avio's assets, including its turbine systems and aerodynamics expertise, to add value to its own line of natural gas power generators and wind turbines. Leveraging Avio transmissions systems technology may also help the company compete more effectively with peers Siemens (SI 4.49%) and Emerson Electric (EMR +0.91%), where GE currently lags in energy management. GE also sees opportunities for Avio technology in oil and marine products.
So if the prospects look bright, was the price right? GE paid about 1.8 times 2011 sales, higher than GE's 1.5 times sales or United Technologies' 1.3 times sales. However, considering the growth Avio could realize just by being plugged into GE's sales, research and development, and corporate infrastructure, earnings could more than justify this premium. GE estimates that the price represents eight-and-half times 2012 EBITDA (earnings before interest, taxes, depreciation, and amortization), a steal compared to GE's nine times EBITDA. Only time will tell, but it seems like a great addition to a strong industrial portfolio that GE has been aggressively growing since the recession.
