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Pratt Purchases Rolls-Royce Stake in IAE for $1.5 Billion

Pratt & Whitney will pay $1.5 billion to buy out Rolls-Royce Group Plc (RR/)’s share of one aircraft-engine venture while the companies form a separate partnership to power midsize jets.

Rolls-Royce also will receive an undisclosed payment for 15 years for each hour flown by planes now equipped with V2500 engines as it leaves the alliance, International Aero Engines, the companies said in statements yesterday.

The new venture will focus on supplying engines for jets seating 120 to 230 people, with equal stakes for each company. The partners sued each other in 2010 for patent infringement over a larger Pratt & Whitney engine and reached an impasse on marketing another model for the Airbus SAS A320 jets in the earlier alliance.

“This shows a change in relationship between Rolls and Pratt,” said Howard Rubel, a Jefferies & Co. analyst in New York. “The antagonism of six months ago is clearly gone, otherwise a deal like this couldn’t have happened.”

Pratt & Whitney, which is a unit of United Technologies Corp. (UTX) and is based in East Hartford, Connecticut, will continue its partnership in the older venture with Germany’s MTU Aero Engines AG and Japanese Aero Engines Corp. Pratt and London- based Rolls-Royce hope those partners also will join the new undertaking, executives said yesterday on a conference call.

‘Unified Approach’

With Pratt & Whitney as majority owner of International Aero Engines, the existing alliance “will be able to offer customers a unified approach” to supplying engines for the A320 and A320neo planes, said Todd Kallman, president of the company’s commercial engines unit.

The companies had divergent views on the Pratt & Whitney geared turbofan engine that will power the A320neo variant starting in 2015. That plane and the older A320 compete with Boeing Co. (BA)’s single-aisle 737, the world’s most widely flown jetliner.

“We’ve found a way we can continue to partner with Pratt & Whitney while not investing industrially in the neo, and I think it’s a perfect solution,” Mark King, Rolls-Royce’s president of civil aerospace, said on the call. Rolls-Royce will continue to build parts for the V2500 engines.

The new engines will compete in a market segment expected to require 20,000 new aircraft over the next 20 years, King said. He said the engine makers share a common view of technology needs for future jet models.

Industry Competitors

Pratt & Whitney’s competitors in that market include CFM, a venture between France’s Safran SA (SAF) and General Electric Co. (GE), the world’s largest maker of jet engines. Jamie Jewell, a CFM spokesman, declined to comment on the new engine alliance.

Rubel, who has a “buy” rating on United Technologies, said the new partnership will eliminate differences over marketing between Pratt & Whitney and Rolls-Royce, smooth the U.S. company’s transition to the next generation of engines, and provide years of future spare-parts sales.

The venture will “better align the companies to compete against the GE/Safran partnership, which currently has approximately 75 percent market share in the narrow-body market,” Carter Copeland, a Barclays Plc analyst in New York, said in a note to clients today. Copeland has an “overweight” rating on Rolls-Royce and United Technologies.

Pratt & Whitney will pay for Rolls-Royce’s share of the earlier venture with cash now held outside the U.S., said Katy Padgett, a spokeswoman.

The transaction “unlocks trapped overseas cash,” Rubel said. King said Rolls-Royce will use the $1.5 billion for “normal corporate purposes.”

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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