Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

General Electric Co. would like you to know that it has an avionics business, too.

Such technology -- essentially the brains of an airplane -- is a hot commodity right now, with United Technologies Corp. earlier this month announcing a $30 billion takeover of Rockwell Collins Inc., a leader in this space. Boeing Co. is also developing avionics as it seeks to reduce costs and control more of its supply chain. And GE has a presence, too, but it's sort of an also-ran. GE Aviation CEO David Joyce might as well have chosen the title "Us, too!" for an avionics-focused slide included in his presentation at a Morgan Stanley conference presentation on Thursday.

Joyce talked up how happy he was with GE's avionics portfolio (I think he said that five times). But GE doesn't tend to talk about its avionics business all that much. The inclusion of this slide makes me think Joyce isn't as content as he claims and may want more -- whether that means taking advantage of United Technologies and Rockwell Collins' distraction to gain a bigger foothold in the industry or contemplating a transaction of its own with Honeywell International Inc.  

Power Player
Combining GE and Honeywell's aerospace units would create a behemoth with more than $40 billion in revenue. That would make it a worthy, if not bigger, rival to United Technologies post Rockwell Collins.
Source: Bloomberg
Note: Exact pro-forma sales are difficult to calculate and depend on the divestitures required by regulators.

Avionics and digital systems contribute about $800 million of revenue to GE on an annual basis. On Thursday, Joyce said that all of the opportunities GE has won in avionics amounts to more than $6 billion in business. That's not nothing. A joint venture with state-owned Aviation Industry Corporation of China and a big contract win on Boeing's 777X, among other deals, have helped put it on the map. But it's still small relative to what Honeywell and Rockwell Collins have and tends to get overlooked in the context of GE's $26 billion in overall aerospace revenue. 

You could argue that GE should have been in the running for Rockwell Collins. Getting its hands on more of that high-margin business was one big reason GE tried (and failed) to buy Honeywell in the early 2000s. But with the company navigating a CEO transition, cash-flow issues and a looming earnings reset, it wasn't in the best position to go head-to-head with United Technologies for a big prize like that.

In Between the Lines
There's speculation GE may move closer to a GAAP number when its new CEO announces the results of his portfolio review in November. Its adjusted EPS has varied significantly.
Source: JPMorgan analyst Steve Tusa

That may work out in GE's favor in the end. Rockwell Collins was expensive, and GE investors have had to stomach enough pricey deals in recent years, thank you. United Technologies is going to be busy integrating this merger for a while (if it's approved by regulators). That could open the door for GE to steal some market share. Joyce trumpeted the company's low-cost position in avionics through the China joint venture, something that could be attractive to Boeing and Airbus SE as they seek to control costs.

Losing Faith
A merger of GE and Honeywell's aerospace units may be a while out as new CEO John Flannery gets his footing. He has plenty to clean up internally, with earnings estimates slumping.
Source: Bloomberg

Or GE could give a merger with Honeywell's aerospace business another shot. The idea has been percolating among analysts as Honeywell considers spinning off the division, a move urged by activist investor Dan Loeb. I've been skeptical about whether Honeywell needs to separate its aerospace business, but management's body language seems to have shifted on a breakup, with CFO Tom Szlosek commenting earlier in the week at the Morgan Stanley conference that it's pretty clear "we do want to narrow the focus." The value proposition of an aerospace spinoff is greater once you layer a GE merger on top.

Joyce trumpeted GE's avionics business as a "growth platform" with a lot of "optionality" on Thursday. Might one of those options include a deal with Honeywell?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Contracts for aircraft and the revenue they yield are typically spread out over multiple years.

  2. While GE's last attempt at a Honeywell merger was blocked on antitrust grounds, the companies appealed the ruling and the court was critical of regulators' attempt to disqualify the deal because of its conglomerate effects, as opposed to the more traditional critiques of specific overlap. That may clear the way for them to give it another go, at least from a regulatory perspective.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net