GKN acquires Volvo Aero for £633 million

It supplies all the major aero engine manufacturers and has positions on most major civil aerospace platforms that are set to increase as aircraft build rates ramp up. Volvo Aero employs some 3,000 people based in Sweden, Norway and the USA. Nigel Stein, Chief Executive, GKN plc, said: "This is a highly attractive acquisition for GKN creating a market leader in aero engine components. With excellent technology and strong life-of-programme positions on most civil aero engines, Volvo Aero will significantly enhance GKN Aerospace's engine components business." The acquisition enterprise value is SEK6.9 billion (£633 million) comprising SEK5.6 billion (£513 million) of equity value (consideration) together with an anticipated Volvo Aero pension settlement (£50 million) and working capital refinancing (£70 million). The acquisition is expected to complete during the third quarter, subject to regulatory approvals. It will be funded by new debt and a £140 million placing of new ordinary shares, representing approximately 5% of GKN's current market capitalisation. For the year ended 31 December 2011, AB Volvo reported audited results attributable to Volvo Aero of sales of SEK6.5 billion (£600 million), EBITDA of SEK0.8 billion (£75 million), EBIT of SEK0.3 billion (£30 million) and gross assets of SEK9.3 billion (£855 million). In 2012, GKN expects Volvo Aero's sales to be around SEK7.3 billion (£670 million) with EBITDA anticipated to be approximately SEK1.1 billion (£100 million). The acquisition enterprise value equates to an expected 2012 sales multiple of 0.9 times and an expected Volvo Aero 2012 EBITDA multiple of 6.3 times. In 2013, the first full year of ownership, the transaction is expected both to be enhancing to GKN's earnings per share on a management basis and to generate a return on invested capital that exceeds the Group's pre-tax weighted average cost of capital of 12%. The Volvo Aero operating margin is expected to meet the GKN Aerospace target range of 11-13% in 2013 due to operational process improvements and cost savings, which are expected to total 3-4% of Volvo Aero sales by 2014. The combination of GKN Aerospace and Volvo Aero creates a world leader in both aero structures and aero engine components. Within aero engines, GKN's composite leadership together with Volvo Aero's strong metallic technology provides a unique offering to customers who are focused on lightweight, high performance engine solutions. Volvo Aero has strong life-of-programme positions on existing platforms and a pipeline of new technology, offering a long-term revenue stream and opportunities for growth. This transaction supports the growth strategy of GKN Aerospace, increasing its pro forma 2011 sales to more than £2 billion, of which two thirds would have been to the civil aerospace market. On the same pro forma basis, GKN Aerospace would have represented around 31% of GKN Group sales and 37% of Group trading profit. Nigel Stein added: "Volvo Aero has invested heavily to secure positions on new engine programmes, offering a long-term platform for growth. Its strong standing with customers, together with its skilled workforce and high quality engineering team, will be a valuable addition to GKN Aerospace.
GKN Aerospace will now be a leader in the aero engine sector, complementing its leading position in composite aero structures."

GKN Trading update
GKN's business performance in April and May continued in line with the first quarter of the year.

Overall, Group sales for the five months to 31 May 2012 increased 17%, with underlying sales up 9%. Management trading profit increased 23%, up 13% on an underlying basis.

In GKN Driveline, underlying sales growth was 10%, temporarily flattered by last year's Tsunami effect. Excluding the Getrag Driveline Products acquisition, which performed ahead of expectations, GKN Driveline's year to date margin was similar to 2011. Powder Metallurgy achieved 9% underlying sales growth and profit and margin continue to show good progress.

GKN Aerospace's underlying sales grew 9%, ahead of expectations due to variation in delivery schedules which should normalise for the year as a whole. Profit progressed in-line with expectations. GKN Land Systems sales increased 16%, up 6% on an underlying basis, although the rate of growth is slowing reflecting weaker European industrial markets. GKN Land Systems' margin at 10% continues to show improvement helped by the contribution from Stromag.

First half free cash flow is expected to be broadly neutral reflecting normal seasonality, increased capital investment to support growth and working capital requirements. Free cash flow for the second half is expected to be ahead of the comparable period in 2011.

The Board continues to expect that 2012 will be another year of good progress and anticipates increasing the interim dividend by 20% to 2.4 pence per share, when the half year results are announced on 31 July 2012.

Exchange rate: £1 to SEK10.9 used throughout this press release.

Nothing in this announcement is intended to be a profit estimate for any period or a forecast of future profits and statements relating to earnings accretion should not be interpreted to mean that the earnings per GKN share for the current or future financial periods will necessarily match or exceed its historical published earnings per share.

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries (excluding subsidiary businesses sold and closed) with the Group's share of the sales and trading profit of joint ventures. Trading margin is trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group's share of net interest payable and receivable and taxation of joint ventures. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to underlying results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations.