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Avio Sale Puts New Italian Law to the Test

May. 9, 2013 - 09:49AM   |  
By TOM KINGTON   |   Comments
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ROME — A new Italian law guaranteeing the government’s influence over strategic companies will be put to use for the first time as General Electric (GE) purchases the aviation activity of Italian propulsion firm Avio.

In December, the US giant agreed to buy Avio’s aviation activity from UK investment fund Cinven at a cost of US $4.3 billion, and expects a response to antitrust applications in the US and Europe by June, a GE source said.

Meanwhile, GE is in talks with the Italian government over guarantees the company must also make to maintain and secure Avio’s defense and security work, thanks to Italian law number 56, which was passed last year, a source in Italy with knowledge of the talks said.

The application of the law to Avio means Rome can be sure the company’s work on engines for the Eurofighter Typhoon, A400M airlifter and the M-346 trainer jet is maintained, even as Avio falls under US ownership. The company saw revenue growth last year of 16 percent to €2.3 billion (US $3 billion), with around 27 percent of the work related to military aircraft engines.

“This law gives Rome greater influence over the strategic activity of the company, and without the law, the sale might not have been possible, probably involving a public fund as new shareholder,” the source said.

A GE spokesman declined to give details, stating, “GE is in the heart of discussions with the various parties engaged in the approval process.”

Law 56 was designed to replace Italy’s golden share system, under which it maintained the final say over strategic decisions in specific public companies, including Avio stakeholder Finmeccanica. The system was deemed anti-competitive by the European Union, prompting Rome to formulate the new law, which allows the sell-off of strategic activities but obliges buyers to guarantee security of supply.

The law is split into two parts — one dealing with defense and security work, the second with energy, communications and transportation. In February, a follow-up decree to the law was issued covering the specific types of defense and security work covered.

“The decree detailing what specific civil work is covered by the second part of the law is yet to be drawn up,” the source said.

With Avio’s defense work covered by the decree, GE is in talks with the Italian government on guarantees it must give. If and when talks are wrapped up, a further decree specifically authorizing the sale is expected within weeks, the source said.

GE will need to keep the activity covered by the law in Italy, unless it receives permission from Rome to take it out of the country, the source said. It also must invest to maintain capabilities, guarantee logistical support for engines already supplied for Italian and inter-governmental programs in which Italy is involved, protect the security of information on classified programs, and share all plans for strategic development with Rome.

A committee that includes GE and Avio managers and Italian government officials will be set up to monitor GE’s handling of Avio’s defense work.

The source said GE made a good impression with its plans for Avio’s civil activities, which include work on Boeing and Airbus jet engines.

GE has said it aims to make Avio its global center for work on engine transmissions, as well as a European center of excellence.

The takeover ends months of uncertainty over Avio, which had attracted the attention of France’s Safran group.

Avio also was seen as an investment target by Italy’s state stra­tegic fund, after owner Cinven decided to sell the firm’s aviation activities and mulled an initial public offering.

The GE buyout follows a hostile reaction to Safran’s overtures in Italy, reflecting Italy’s sensitivity to French takeovers.

Italy’s Finmeccanica group, which held a 14 percent minority stake in Avio, also has sold its stake in the company’s aviation activity to GE, after early plans for it to sell its stake to the Italian strategic fund.

Cinven bought Avio in 2006 from US investment fund Carlyle, which in turn had purchased it in 2003 from its historic owner, Italian automotive company Fiat.

Cinven and Finmeccanica have held on to Avio’s space activities, which saw €285 million in sales in 2012. The activities include work on the Vega launcher, with the second launch due this month.

Finmeccanica has an option to buy out Cinven’s share in the space activities by October, the source said, while Safran, EADS and US company Aerojet also are interested.

In the meantime, the Italian government must produce a decree defining which aspects of the energy, communications and transportation sectors it deems strategic to complete the provisions of the new law.

Once completed, the law might then be applied if and when Finmeccanica pushes through its long-planned sale of civil unit Ansaldo Energia, which has faced opposition from Italian politicians. ■

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