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GE/Honeywell merger approved - Lycoming to be sold.

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GE/Honeywell merger approved - Lycoming to be sold.

Old 3rd May 2001, 08:28
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Unhappy GE/Honeywell merger approved - Lycoming to be sold.

U.S. Reach Deal on GE, Honeywell Merger

By Peter Kaplan

WASHINGTON (Reuters) - The U.S. Justice Department (news - web sites) on Wednesday approved General Electric Co.'s $42 billion purchase of Honeywell International Inc. after the companies agreed to sell a military helicopter engine unit and let a new company service some of Honeywell's small, commercial jet engines.

The department said it reached an "agreement in principle'' with the companies and won't oppose the combination of the world's largest manufacturer of jet engines with a leading avionics company as long as the companies meet the conditions.

"Without this divestiture, the U.S. military would likely have faced higher prices, lower quality and reduced innovation in the design, development and production of the next generation of advanced U.S. military helicopter engines,'' said Constance Robinson, an official at the U.S. Justice Department's Antitrust Division.

Honeywell's military helicopter engine business accounted for revenues of about $200 million in the year 2000, the department said.

In addition to that divestment, the companies also have to authorize a third party to start doing the lucrative heavy maintenance, repair and overhaul of some Honeywell aircraft engines and auxiliary power units, the department said.

With the approval from U.S. antitrust enforcers, the focus shifts to Europe, where antitrust officials are still studying the deal and have expressed broader concerns.

"I thought that was the lowest hurdle level that they'd have to clear,'' Edward Jones analyst William Fiala said, referring to the deal with U.S. regulators. "The big test is the EU decision.''

GE officials welcomed the action and looked forward to reaching agreement with the European Commission (news - web sites).

"Now that the U.S. has completed its review of the transaction, we can focus on the continuing discussions with European Commission officials,'' said Jack Welch, GE chairman and chief executive.

Company executives have indicated they will consider making further concessions to European regulators, possibly including a promise to separately price jet engines and avionics products.

The offer to the Europeans could also include a promise that the companies won't cut off key parts they currently manufacture for rival engine makers, sources close to the deal said.

"We remain positive about that process and hopeful that we can proceed promptly to a just conclusion,'' Welch said in a brief statement without going into detail.

U.S. antitrust officials were concerned that GE and Honeywell are two of only three companies authorized to service one of Honeywell's turbofan engines used to power small and mid-sized business jets.

Commercial business aircraft users "would likely have suffered increased prices and reduced quality in the repair and overhaul of Honeywell aircraft engines and (auxiliary power units,'' Robinson said.

Fiala and other analysts said the sale of the conditions were a small price to pay to get the merger approved.

"I thought they would get through it relatively unscathed, and I think that's what's happened, at least from the U.S. perspective,'' Fiala said.

Analysts have speculated that Textron Inc., maker of the Bell helicopter and Cessna airplanes, along with diversified manufacturer United Technologies Corp. may be interested in the helicopter engine business.

Industry analysts also say approval from U.S. regulators could put pressure on the European Commission to accept the deal. If antitrust regulators on both sides of the Atlantic reach opposite conclusions about the merger, the dispute could turn into a political conflict and hobble cooperation on other trade and antitrust issues, they said.

European competition officials fear the combination of GE's jet engines and financing arm with Honeywell's avionics products could create such a large portfolio of different airplane components that it could foreclose competition in some aerospace markets.

In addition, European regulators have expressed concern that the deal would give GE too large a share of the market for engines that are used to power 70- 90-seat regional jets. Both companies already have large presence in that market.

In the United States, regulators traditionally been less concerned about the fate of individual competitors, and more skeptical about the "the portfolio effect.''

Under European law, the commission has until July 12 to decide whether it will oppose the transaction. The commission reviews all mergers in which companies have significant market share in Europe.

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