LONDON -- This morning's news delivered confirmation that FTSE 100 engineer GKN (ISE: GKN.L) is to pay $985 million to buy Volvo Aero, the aero engine division of AB Volvo.
Concern over how this widely expected deal would be funded has been one of the factors keeping a dampener on GKN's share price recently. In a clear sign of the market's approval, GKN's share price rocketed by more than 8.5% when markets opened this morning and is up by 12% as I write.
So is this a good deal for GKN shareholders? I think so.
Firstly, GKN's timing seems good.
The latest forecast from aircraft manufacturer Boeing (NYS: BA) is that 33,500 new passenger aircraft and freighters will be needed by 2030 -- with a total value of more than $4 trillion. Boeing expects passenger and cargo traffic to increase by 5% per year over the next 20 years, mostly thanks to surging demand from emerging markets in India and China.
Volvo Aero produces engine components for all the major aero engine manufacturers, meaning that GKN now has a significant and broad presence in the global jet engine market. This should complement its existing aerostructure business (it builds wings for Airbus, for example) and leave it well-positioned to take advantage of global demand for new aircraft.
Bet on jets
Secondly, Boeing and GKN are not the only people expecting an upturn in demand for jet aircraft.
Billionaire investor Warren Buffett's ability to time his purchases to take advantage of market cycles is legendary -- and his private-jet service company NetJets has just placed a $9.6 billion order for 425 new planes. NetJets' CEO described the orders as "a long-term bet on the global economy" and will no doubt have gotten big discounts on the $9.6 billion list price, thanks to the size and timing of the orders.
Although the bulk of NetJets' fleet is based in the U.S., one of Buffett's other recent big deals involved a major FTSE 100 company in which he invested more than $1 billion to take his holding to more than 5%. If you'd like to know more about this deal -- including the identity of the company and the price paid by this legendary investor -- then I recommend this free report, which has all the details.
Of course, a good deal can turn bad if the price isn't right, but GKN seems to have done well in this department, too.
The $985 million being paid for Volvo Aero by GKN is made up of a $798.6 million payment for the main business, plus a $109 million refinancing deal and a $77.8 million pension settlement. This equates to 0.9 times Volvo Aero's expected sales for 2012 and 6.3 times its expected EBITDA, which doesn't seem excessive in a rising market.
GKN is paying for the acquisition with new debt and a $218 million share issue, but the company says it expects Volvo Aero to make a positive contribution to the company's earnings and to generate a return in excess of its cost of capital immediately. This should mean that the company can continue to fund its rising dividend -- good news for Foolish shareholders.
Even after today's share price surge, GKN is currently valued at just 8.3 times its 2011 earnings, which I think looks cheap for such a large, diverse engineer.
Trading profit has risen by 13% so far this year on an underlying basis, and the company is planning a 20% hike in its interim dividend when it publishes half-year results at the end of this month. This should push its current 3.2% yield closer to 4%, taking it into income territory.
Finally, for another solid FTSE 100 income share tip, don't forget to check out that special report I mentioned about Warren Buffett's latest U.K. share purchase -- you can download it here, completely free.
He avoided techs in the dot-com bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor."
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At the time thisarticle was published Roland does not own any of the shares mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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