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26 May 04. Italy’s Finmeccanica (Milan:SIFI.MI – News) agreed on Wednesday to pay £1.06bn ($1.93bn) for GKN’s (London:GKN.L – News) share of their helicopter making joint venture AgustaWestland.

GKN said it would use proceeds from the sale of its stake in the world’s second-largest helicopter maker to pay down debt and fund acquisitions in the aerospace or automotive sectors.

“The market should not worry too much about GKN’s earnings dilution (from the sale), as other acquisitions are bound to restore profitability and even improve the quality,” one trader said.

For Finmeccanica, the deal will reduce the company’s reliance on joint ventures, a factor that has contributed to its shares trading well below the value of its parts, analysts said.

Shares in both companies climbed, with GKN up 4.2 percent at 229 pence, outpacing London’s FTSE 100 index which was up 0.37 percent as of 1030 GMT. Finmeccanica was up 3.7 percent at 61.8 eurocents. The Italian firm said it would pay for the stake with long-term debt and the proceeds from the sale of 50 to 55 million shares in Italian-French chipmaker STMicroelectronics (Paris:STM.PA – News; Milan:STM.MI – News). That sale could raise more than 900 million euros at current market prices. Finmeccanica, which is 32.4 percent owned by the Italian government, said last month it planned to sell down its stake in the chipmaker. STM shares fell on the news but quickly recovered, standing 1.9 percent higher at 18.03 euros.The AgustaWestland deal is expected to close this year, Finmeccanica said in a statement. (Additional reporting by Alison Tudor in Rome)

GKN intends to use a large part of the £1.06bn ($1.92bn) it will collect from the sale of its 50 per cent share of the AgustaWestland helicopter business to strengthen its automotive driveline and aerospace components businesses.

Kevin Smith, the UK engineering group’s chief executive, said he was “comfortable” with the idea that, without helicopters, GKN’s main businesses would be based on supplying to the car and aerospace industries high-tech parts that had a number of technical characteristics in common.

“I feel we can build on these areas and achieve growth,” he said. The company on Tuesday announced it would sell its 50 per cent stake in AgustaWestland to Finmeccanica of Italy, its joint venture partner. Mr Smith said GKN had not been looking for a sale, but that Finmeccanica had made a decent offer.

The agreed deal presupposes the award by the UK MoD of the ‘Future Lynx’ contract to re-equip the British Army and Royal navy with a fleet of remanufactured Lynx helicopters. In the event that the contract is not awarded the consideration will be adjusted by £35m. The deal is expected to be completed by year end.

Comment: A rearguard action by EADS to prevent this deal including a visit to Jacquie Smith, the Trade Secretary, pledging that the company would remain ‘British’, carried no weight with the government. EADS wants to sell the NH90 to the UK but the EH101 has an established presence here. This deal will also cause Finmeccanica to overtake EADS in the number of UK employees (after the EUROSYSTEMS deal) with some 17000 employees against EADS 13000. It also gives little room for EADS to establish a larger presence in the UK. Phillipe Camus of EADS admitted to BATTLESPACE that, given the Italian Government’s desire to build up defence as a strategic industry, they had very deep pockets and would pay top price to establish a large in-country presence. The Westland plant at Yeovil will be safe from any rumors of closure.

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