FLUG REVUE October 2003: MTU sell off raises questions

WHAT PROSPECTS FOR MTU?

By Karl Schwarz

Small companies owned by large conglomerates are in a difficult situation. Even if they exceed the rate of return expected by the parent company, in today's difficult business climate they can quickly find themselves up for sale simply because they do not belong to the core business. That is what is happening to MTU Aero Engines at the moment. The prospect of one and half billion euros cash in hand is currently more attractive to DaimlerChrysler CEO Jürgen E. Schrempp than annual profit contributions from the Munich-based engine builder (presumed to be in triple-digit millions) which, as far as the group is concerned, are marginal. A purchaser is therefore needed, as Daimler-Chrysler spokesman Hartmut Schick officially confirmed for the first time at the end of August.

But disposing of this high-tech pearl will not be that simple, as Schrempp should know from his own painful experiences some years ago as chief executive of Dasa. For, in an engine industry that is very much a global business, the main players are closely intertwined with each other through participation in countless military and civil programmes. Something that MTU understood only too well when it went about making itself an indispensable provider of major subsystems to Pratt & Whitney and GE Aircraft Engines. Then on top of this, the company is involved in important European military engines. Its strategic partner Pratt even obtained contractual assurance that MTU could only change hands with its consent. Extensive negotiations will thus be needed.

Meanwhile the German government has woken up to the fact that important German defence companies have moved into foreign ownership in recent years. “As far as MTU is concerned, I hope that this very important company will remain in German hands,” said Minister of Economics Wolfgang Clement. He announced an amendment to the Foreign Trade and Payments Act that will enable the German government to retain the right to veto any sale in future. But such proposed restrictions are ill received by the industry especially when it has to deal with a notoriously inadequate Bundeswehr procurement budget.

DaimlerChrysler has stated verbally that the company is seeking a “European solution”. But this was surely intended more to pacify objectors, as a dispute with the government would no doubt have an adverse effect on the valuation of MTU. In reality, however, the list of would-be purchasers is dominated by American investment companies, Blackstone, Carlyle, JF Lehmann and Kohlberg Kravis Roberts. Doughty Hanson of the UK is another private equity company, which recently acquired a majority interest in the Auto-Teile-Unger Group.

No doubt these companies have strategic concepts for MTU, but so far they have not leaked out into the open. Thus one can only speculate that Doughty Hanson might merge the company with the engine activities of its Dunlop Standard Aerospace Group, which includes maintenance organisations for smaller powerplants (Standard Aero) and the components manufacturer Aero Engine Equipment. This would complement MTU's portfolio nicely and also expand its business in North America, but would not exactly qualify as a strategic masterstroke.

This is most likely to come from Carlyle, which in the spring acquired a 70 percent stake in Italian engine manufacturer (Fiat) Avio. But Carlyle does not have the last word, as the state holding company Finmeccanica has secured for itself, at the insistence of the government in Rome, the right to veto significant strategic decisions. A merger might thus be possible, but it will certainly not be plain sailing. And what would the outcome be? Even if Sweden's Volvo were added in the long-term, the result is still not a serious competitor to the Big Three in the industry – quite apart from the fact that no one needs one either.

Perhaps the best alternative is that MTU should be able to remain independent under the new ownership and, above all, be able to continue its long-term orientation. Namely, as a small but outstanding repository of technological expertise that excels in low-pressure turbines and high-pressure compressors, and whose experience is indispensable to Pratt and GE. As a global maintenance organisation that can claim to be the biggest independent service provider in this area. And, naturally, as systems leader for the Bundeswehr's engines. In the crisis environment of recent years, MTU has impressively proven its ability to cope with these challenges.

From page 4 of FLUG REVUE 10/2003

Last updated 1 September 2003

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