Jan. 15 (Bloomberg) -- General Electric Co., the biggest jet- engine maker, agreed to buy Smiths Group Plc's aerospace unit for $4.8 billion as rising demand for travel drives record sales of commercial aircraft at Boeing Co. and Airbus SAS.

The purchase will broaden GE's offerings for airline and military customers, including computers that control planes in flight, Fairfield, Connecticut-based GE said today in a statement. Shares of London-based Smiths rose 11 percent as it plans to return 2.1 billion pounds ($4.12 billon) to shareholders.

Chief Executive Officer Jeffrey Immelt wants to tap a quadrupling in demand for civil planes in the past five years as well as plans by the U.S. military to develop new aircraft. The purchase would give GE some products, such as cockpit electronics, the company didn't get when the European Union rejected its $45 billion bid for Honeywell International Inc. in 2001.

``This is clearly Immelt taking the step to become a consolidator in the aerospace equipment business,'' said Will Mackie, an aerospace analyst at Mainfirst AG in London. ``GE already has the engines business, and this is a step to diversify into airframes and control.''

Smiths shares rose 109.5 pence to 1094.5 pence in London. GE shares fell 3 cents to $37.89 in New York Stock Exchange trading Jan. 12. U.S. markets are closed today for the Martin Luther King Jr. holiday.

Joint Venture

Smiths will also form a joint venture with GE to combine the pair's detection and homeland-protection businesses. Smiths GE Protection will be 64 percent-owned by Smiths and chaired by its chief executive officer, Keith Butler-Wheelhouse.

Smiths's board last autumn began studying whether Smiths was the ``best owner'' for the aerospace business and concluded that shareholders would be better served if the business were sold to a bigger aerospace company, which ended up being GE.

The sale leaves Smiths with a division that includes products for anesthesia and respiratory care, sealing systems, and the security joint venture. The aerospace unit, which accounted for almost a third of Smiths's revenue, has more than 11,000 employees and $2.4 billion in sales in 2006.

The purchase will add to GE's profit in the first year, Immelt said on a call with reporters today.

Smiths is developing computer systems and equipment for Airbus's A380 jet and Boeing's fuel-efficient 787 and its 767 military refueling tanker. Smiths also makes military airframes and components, including some for Lockheed Martin Corp.'s F-35 plane, formerly known as the Joint Strike Fighter.

The acquisition is ``largely complementary technology, we view this as additive, not consolidating,'' Immelt said when asked whether jobs might be cut. GE employs 16,000 people in the U.K.

Price Tag

The price seems ``relatively high,'' though determining the right multiple is tough due to the absence of recent comparable deals, said Philip Finnegan, an analyst at Fairfax, Virginia-based Teal Group.

``This is a quality business that helps GE get more into the cockpit and into selling more complete systems,'' he said.

GE is paying about two times sales. Competitor Rockwell Collins Inc. has a market value of about $11 billion, with $3.9 billion in fiscal 2006 sales, and Goodrich Corp., which makes engine casings, has a market capitalization at just more than one times its 2005 sales of $5.4 billion.

The purchase ``may look expensive today, but it probably won't in a few years' time,'' said Clive Forestier-Walker, a London-based analyst with Numis Securities who has an ``add'' rating on Smiths. ``The aerospace cycle looks strong.''

The industry is benefiting from demand in Asia and the Middle East, where the number of first-time air travelers is growing along with regional economies and airline deregulation. Chicago- based Boeing this month said orders reached a record in 2006, its second straight record-setting year.

Honeywell Fight

The Honeywell acquisition was supposed to be retiring CEO Jack Welch's crowning achievement and provide Immelt with a bigger earnings cushion for years to come. Welch outbid United Technologies Corp. for Honeywell, and the deal would have been the company's biggest acquisition ever.

GE, also the world's biggest aircraft lessor, may have an easier time with European regulators this time. That's because while the appeals court upheld the rejection of the Honeywell deal, it did say in 2005 that the EU was in error in using an argument for ``conglomerate'' effects used by then Commissioner Mario Monti, opening the way for aerospace acquisitions by GE.

``After the court case, there's no great issue for GE,'' said Chris Bright, a consultant for Shearman & Sterling LLP who represented GE during its bid for Honeywell.

The Smiths aerospace division is ``much smaller'' as measured by sales than the Honeywell acquisition, Immelt said. Combined purchasing for supplies and administration overlap will help boost Smiths's margins under GE, Immelt said. In the past six years, 16 deals have been approved by the EU, he said.

Smiths Pressure

GE plans to buy about $7 billion in non-financial assets this year, Immelt said in December. He has spent almost $70 billion on acquisitions since 2001, and people familiar with the talks said last week that he is seeking as much as $10 billion in an auction of GE's plastics unit.

Credit Suisse, Evercore Partners and JPMorgan Cazenove advised Smiths on the deal. GE's adviser was Morgan Stanley.

Smiths in the past two years faced pressure from investors after the company's results missed some forecasts, Credit Suisse analysts including Steve East said in November.

Butler-Wheelhouse said in an interview that some of the money from the sale could be used for acquisitions.

The yield premium, or spread, that investors demand to hold Smiths's 7.25 percent bonds due in 2016 compared to government debt with a similar maturity, rose to 96 basis points, its highest in almost two months, from 91 basis points.

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net; Andrea Rothman in Paris at +33=1= aerothman@bloomberg.net

Last Updated: January 15, 2007 12:58 EST