General Electric announced that it has agreed to purchase the aviation business of aerospace propulsion components provider Avio S.p.A for $4.3 billion (€3.3 billion). This deal was orchestrated by GE’s Aviation Group. Avio is a supplier of low-pressure turbine systems, gearboxes, geared systems, combustors and other components. The transaction is still subject to regulatory approvals.
This is another example of a large global provider, GE Aerospace in this case, acquiring one of its major suppliers, who has been a supplier to GE Aviation since 1984. The deal is touted as strengthening GE’s supply chain capabilities as well as opening up broader opportunities to supply components to both aerospace and other industries. GE was also willing to pay a hefty 8.5 multiple based on 2012 earnings.
Business media is reporting that this deal was in the making for the past 18 months. The agreement calls for Avio to become the headquarters of GE’s mechanical drivers business and a center for its turbines unit. GE has pledged to invest over $1 billion in Avio operations the next ten years. In an interview published in the Financial Times, Avio CEO Francesco Caio characterized this deal as GE pushing to “master their supply chain”, a trend he expects to continue in the industry. With Europe officially in recession and continuing to undergo financial stress, there has been concerns relative to the financial well-being of key aviation and aerospace suppliers located in Europe’s financially stressed countries. Supply Chain Matters echoed this concern again in Prediction #5 of our 2013 Predictions for Global Supply Chains.
GE elected not to acquire the space and defense business operations of Avio in this acquisition. The Italian political climate also had some influence in the timing of this deal, since appointed Prime Minister Mario Monti, who was much more upon to expanded foreign investment in Italy’s businesses, just resigned and will stand for the next election.
In our view, it is yet another proactive response to stress within the global aerospace industry as firms take actions to insure strategic continuity of their global supply chains.