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07 Mar 07. Meggitt has agreed a $1.1bn (£571m) bid for K&F Industries of the US, showing that UK companies will not play a passive role in merger activity in the global aerospace parts sector. Speculation has centred since last summer on possible approaches from large US and European industrial groups for UK aerospace and defence manufacturers such as Ultra Electronics, Cobham and Meggitt. In the biggest deal so far, GE, the US industrial conglomerate, agreed a $4.8bn purchase of Smiths Group’s aerospace business in January. But UK companies also have cash to spend and Terry Twigger, Meggitt’s chief executive, said he intended to build a “significant aerospace and defence group going forward”. He added: “I think speculation about consolidation in the sector is absolutely right. But why people think it would be a one-way street, I don’t know.” As well as the $1.1bn cash purchase price, Meggitt will assume $700m of K&F debt. The transaction will be financed in part by a one-for-two rights issue at 200p per share, which will raise about £424m. The rest will be paid in debt. Rothschild is advising on the deal while Rothschild and Merrill Lynch are managing the rights issue. Separately yesterday, Meggitt reported a 14 per cent rise in underlying pre-tax profit to £132.7m after securing higher profit margins across its civil aerospace and military businesses. Pre-tax profit rose 49 per cent to £130m (£87.1m) on sales up 9 per cent to £670.3m (£616.3m). Earnings per share were 22.2p (15.2p) and a final dividend of 6p (5.3p) is proposed to make a total of 8.6p (7.7p). Its shares rose 5p to close at 329¾p yesterday.
FT Comment: Meggitt could be transforming itself into a mini Rolls-Royce. Like the aircraft engine maker, the smaller manufacturer has targeted the lucrative “aftermarket” for maintenance and support of its specialised products. Meggitt also wants to develop technology with high barriers to entry, another Rolls-Royce tactic. A K&F purchase would lift Meggitt’s aftermarket revenues from 37 per cent of sales to 47 per cent. This should offer protection against any cyclical downturn in the passenger jet market at the end of the decade. Besides that, the technology fit between the two companies appears good, with most of K&R’s sales coming from aircraft wheels and brakes, a big area of business for Meggitt. If the deal is approved by the US, the UK company will hope it opens doors at the Pentagon for its advanced carbon brakes. The vagaries of the aerospace cycle and future defence budgets always brings risk. But a price of about 12 times K&F’s earnings for 2006 is not too heady and cheaper than GE’s Smiths purchase.

09 Mar 07. Thales is looking for acquisitions after turning in a 16 per cent rise in annual net profit to €388m ($509m) and wiping out the debt incurred from its landmark $1.9bn acquisition of Racal in the UK. Denis Ranque, Thales chairman, said “one cycle had been completed” and another, one of “big acquisitions”, had begun. “We now find ourselves in a cash position very similar to before [the Racal deal],” he said. Thales would look at all opportunities in its core businesses of aeronautics, defence and security. From a net cash position of €91m, against a net debt of €1.8bn in 2002 and €398m last year, the group had the flexibility for a sizeable acquisition, especially if it used shares. The group is understood to have been one of the bidders for the aerospace business of Smiths Industries in the UK, but it lost out in January to a $4.8bn bid by GE of the US. Now speculation centres on the group’s interest in parts of Safran, the aeroengine and mobile communications group that has suffered from management in-fighting, poor trading and provisions to correct unexplained accounting entries. It was to thwart a potential bid from Thales that Snecma, the engine maker, rushed to merge with Sagem the mobile communications group, two years ago, a deal that might unravel under Francis Mer, the new chairman. Mr Ranque

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