Acquisition of Volvo Aero
5 July 2012
Volvo Aero acquisition – transaction overview
Excellent strategic fit
Strong financial rationale
Creates a market leader – No.3 in
engine components
Enterprise Value SEK 6.9bn (£633m)
− Consideration of £513m
Business has invested heavily to
secure positions on new engine
programmes
£140m equity placing (c.5%) and debt
6.3x expected 2012 Volvo Aero
EBITDA
Combines complementary product and
technology focus
0.9x expected 2012 sales of £670m
Expect in first full year*
Access to well-respected engineering
capability
− Accretive to management EPS
− Margin to meet GKN Aerospace target of
11-13%
− Generate ROIC above GKN’s WACC of
12%
Creates a balanced GKN Aerospace –
structures and engine products
Strengthens and broadens OEM
relationships.
Value enhancing acquisition for GKN
Note: £1 = SEK10.9
*See note page 19
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Volvo Aero – leading producer of aero-engine components
Designs, engineers and manufactures
components and sub-assemblies for
aircraft engine turbines
Invested heavily to secure positions on
new engine programmes – £290m over last
4 years
Key customers are all the major aero
engine manufacturers
Positions on most major civil aerospace
platforms – will benefit as build increase
Employs some 3,000 people, including
500 engineers
Risk and revenue sharing partner (RRSP)
business model, provides life-ofprogramme participation
Based in Sweden, Norway and USA
Significant aftermarket content providing
profitable long-term revenue streams
High-quality customer base
Focus on civil aerospace
Sales of c.£600m in 2011
Government, 14%
Source: FY11, Management
information, excludes rental income
Note: MTU represents joint
programmes with PW
Source: FY11, Management information, excludes rental income
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GKN and Volvo Aero: complementary product portfolio
Volvo Aero designs and
manufactures components
for aircraft engine turbines.
Range of components
includes:
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Volvo Aero: BLACK
GKN: RED
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Fan/compressor cases
Bearing/housings
Hubs
Spools
Fan/compressor
structures
Compressor rear
frame/diffuser cases
Combustion
chamber/after burner
liners
Low pressure turbine
cases (LPT’s)
Turbine structures
Shafts
Vanes
Combination of complementary technologies
GKN: Composites
Volvo Aero: Lightweight metallic
New technologies
High performance structures
−
Optimised fabrication
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Weld simulation
Composite fan cases
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Automated laser welding
Advanced manufacturing
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Metal deposition
− Advanced fibre placement
Composite fan blades (JV with Rolls-Royce)
Advanced machining and automation capabilities
could be transferred to GKN US sites
Environmental technology
Additive layer technology good match to GKN’s
current development
Multifunctional technologies
− Winglets
− Electro-thermal ice protection
GKN: Composite fan blades
Volvo Aero: Compressor rotors
GKN: Composite fan frame
Volvo Aero: Turbine structures
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Volvo Aero business model
Lower Margin
High Margin
Circa 70% of Volvo Aero is based on
RRSP model
RRSP
RRSP mirrors the OEM model – risks
and rewards are shared based on %
participation
LTA /
LOP*
Year 5
Upfront costs are rewarded by strong
participation in aftermarket sales
Year 10
Year 20
Year 30 &
more
Time
Provides long-term profitability and cash
flows
Good timing for acquisition
− Significant upfront investments in new
programmes already incurred
Reflects
Volvo Aero
contract
positions
Trent 500
Time
Trent 900
* LTA contracts are typically for up to 10 years and
renewed / recomposed through product life cycle
Junior RRSP
Traditional RRSP
Source: Vendor due diligence report and GKN management estimates
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Attractive programme portfolio drives revenue
Secure long-term revenue on civil engines
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Enhanced operating margins
SEK bn
2010
2011
2012
Q1
Sales
7.7
6.5
1.7
EBITDA
0.7
0.8
0.3
EBIT
0.3
0.3
0.2
3.7%
5.2%
14.0%
EBIT margin %
Source: Volvo Group 2011 Annual Report and First Quarter 2012 Report
Source: Volvo Group 2011 Annual Report and Volvo Group Report on the First Quarter 2012
GKN Actions
Operational improvements planned, similar to those applied in previous acquisitions
Identified significant cost savings of 3-4% of sales by 2014
− £24m cost to achieve
Operating margin expected to increase to GKN Aerospace range of 11-13% in 2013
Deliver sales synergies with existing GKN Aerospace
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Transaction details
Funding
Acquisition to be funded through a mix of equity
and debt
£m
Enterprise value
633
Pension settlement
(50)
£500m debt bridge –18 month maturity
Working capital/Net cash
(70)
Debt bridge refinanced in Bond market
Total consideration
513
Equity placing of £140m (c.5%)
Expect to retain current credit rating – continue
to target investment grade
Fees and transaction costs expected of c.£17m
Note: £1 = SEK10.9
Financial rationale
6.3x expected 2012 Volvo Aero EBITDA
Expect in first full year*
− Accretive to management EPS
− Margin to meet GKN Aerospace target of 11-13%
− Generate ROIC above GKN’s WACC of 12%
Strong cash conversion
Hedging operational cash flows to reduce volatility
*See note page 19
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GKN trading update for five months to May 2012
Performance in April and May continued in line with Q1 2012
Group sales +17%; management trading profit +23%
Getrag Driveline Products and Stromag acquisitions performed strongly
On an underlying basis, sales +9%; trading profit +13%
GKN Driveline
GKN Powder Metallurgy
GKN Aerospace
GKN Land Systems
• Underlying sales up 10%
• Temporarily flattered by
2011 Tsunami effect
• Getrag acquisition ahead of
expectations
• Excluding Getrag, margin
similar to 2011
• Underlying sales up 9%
• Good profit and margin
progression
• Underlying sales up 9%
• Ahead of expectations due
to variation in delivery
schedules - should
normalise for whole year
• Profit progressing in line
with expectations
• Underlying sales up 6%
• Slowdown in rate of market
growth
• Division margin at 10%,
helped by Stromag
contribution
H1 forecast free cash flow broadly neutral – H2 expected to improve above last year
2012 expected to be another year of good progress for GKN
Board anticipates increasing the interim dividend by 20% to 2.4 pence per share
Note: Underlying results exclude the impact of acquisitions/divestments as well as
currency translation on the results of overseas operations.
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Transaction supports GKN’s aerospace strategy
Lightweight metallic
capabilities
Positions on growth engines
Enhanced customer
relationship with PW and GE

39,530
LPT (low pressure turbine) cases
Broader
components
Vanes
Turbine structures

Aircraft in service
Added
engine
content
Benefits from strong growth in
civil aerospace market
60%
growth
19,410
40%
replacement
Attractive growth market
Better
balanced
business
Long term revenue visibility
More civil and aftermarket
exposure
33,500
new
aeroplanes

6,030
fleet retained
2010
2030
Source: Boeing commercial market outlook 2011–2030
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Transaction strengthens GKN Aerospace
GKN Aerospace product and market mix
OEM Relationships
Sales before £1.5bn
Sales before
Sales pro forma £2.1bn
Sales pro forma
Other 7%
Government, 4%
Balanced business
Increased civil
Broader customer mix
2011 data. Source: GKN Aerospace 2011 results, 2011 Volvo Aero internal financial information (excludes rental income)
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A leading business with high-quality revenue streams
GKN Group trading profit1
GKN Group sales
Before
Before
Pro forma
Pro forma
Greater aerospace contribution
2011 data. Source: GKN 2011 management information, Volvo Group 2011 Annual Report
1 Trading profit excluding corporate costs and impact of Gallatin
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Summary
Volvo Aero: Leading independent
producer of aero-engine components
£633m acquisition; consideration of £513m
Value enhancing deal
Expect operating margins to meet
GKN Aerospace target range in 2013
Funded by £140m equity placing and new debt
Estimated completion during third quarter 2012
Strong technology fit with GKN Aerospace
Complementary product portfolio
Opportunity to deliver significant cost savings
Expected to be accretive to
management EPS in 2013*
Expected to generate ROIC above
GKN’s WACC of 12% in 2013
Deliver expected synergies of
3-4% of sales by 2014
Compelling commercial and financial rationale
*See note page 19
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Gleacher Shacklock LLP acted as independent financial adviser to the Company. J. P. Morgan Cazenove and UBS Limited
acted as financial advisers to the Company in relation to the acquisition and as joint bookrunners and underwriters in
relation to the equity placing. Barclays Bank PLC, Citi, HSBC Bank plc and The Royal Bank of Scotland plc acted as other
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