GECAS remains stumbling block to European approval

General Electric looked likely to call off its $42 billion merger with Honeywell late last week, after submitting a final proposal that fell far short of the European Commission's (EC) demands for approval of the deal.

GE described the package of undertakings submitted to the EC, including divestitures in Honeywell's Aerospace business totalling $2.2 billion in revenues, as "unlikely" to be accepted.

GE chairman and chief executive Jack Welch stated "we have always said there is a point beyond which we wouldn't do the deal. The Commission's extraordinary demands are far beyond that point."

The undertakings include an offer to set up leasing arm GE Capital Aviation Services (GECAS) as a separate "ring-fenced" entity, "to deal at arms length with Honeywell avionics and non-avionics products", but still 100% owned and managed by GE.

In a statement on GE's offer, EC Competition Commissioner Mario Monti made it clear the company's refusal to offer greater concessions on GECAS remains the stumbling block for EC approval of the merger. Talks with the company explored "commitments which would not have entailed further divestments in the aerospace industry but rather a structural commitment to modify the commercial behaviour of GECAS. We regret that this avenue has not been pursued." The EC is concerned that "bundling" of products, services and financing by a merged GE/Honeywell would hurt competition.

The EC is reported to have demanded $6 billion in divestments originally, including most of Honeywell's avionics business. In its final undertaking, GE has offered to sell Honeywell's AS900 business and regional jet engine, its air turbine starter business and certain avionics and non-avionics products, including braking systems.

Honeywell chairman and chief executive Michael Bonsignore said the GE proposal responded fully to the substance of the issues raised by the EC, but warned: "While continuing to support the merger, we have a comprehensive contingency plan in place if we must move forward as an independent company." Honeywell has sales of $25 billion and has cut costs by $600 million a year since announcing the merger.

As Flight International went to press, it was not clear whether GE would withdraw the merger offer, or wait for the EC to complete its examination of the deal. "Unless the merger notification is formally withdrawn, the Commission will continue with the review procedure," Monti said.

EC procedures require the Competition Commissioner to "market test" the undertakings by seeking reaction from interested parties. These include Lufthansa, believed to be worried by GE/ Honeywell's dominance in the engine services market, and Rolls-Royce, concerned that a GE/ Honeywell/GECAS tie-up would shut other engine manufacturers out of commercial aircraft markets.

If the review goes ahead, the national competition authorities of the EC member states are scheduled to meet on 25 June as an advisory committee, chaired by Monti. The committee's ruling would then be confirmed by the College of Councillors on 3 July.

GE says the submitted undertakings, "in the unlikely event they are accepted", would reduce Honeywell's revenues by 9% and those of the combined firm by about 1.5%. The $3 billion in projected cost savings would remain largely intact and, while the initial earnings increase would be less than projected, GE's longer-term expectations for earnings growth from the merger would remain unchanged.

Source: Flight International