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Jan. 16, 2007, 12:01 a.m. EST

Airline-Parts Consolidation May Follow GE-Smiths Deal

By Rod Stone

LONDON -- Many of Europe's leading aerospace-equipment suppliers are considered to be in play following General Electric (NYS:GE) Co.'s purchase of U.K.-based Smiths Group PLC's aerospace business for $4.8 billion.

The sheer scale of new airplane programs and the desire of top-level players such as Boeing (NYS:BA) Co. and Airbus, which is owned by European Aeronautic Defence & Space Co., to use fewer but larger suppliers is likely to spur deals, say sector watchers. To help cut the costs of developing new airplanes, manufacturers now typically look to involve suppliers as partners that invest in an aircraft's development in return for a future share of revenues.

"The structure of the aerospace industry is changing," said Smiths Group Chief Executive Keith Butler-Wheelhouse .

For the new 787, which is due to enter into service in 2008, Boeing expects to have about 100 to 200 top-tier suppliers compared with as many as 800 to 1,000 on past programs, according to Mike Bair , chief of the 787 project. Overall, the U.S. aerospace giant has gone from more than 30,000 suppliers six years ago to just over 6,000 today, according to a spokesman.

Speaking in Paris yesterday, Denis Ranque , chief executive of French defense and aerospace-electronics giant Thales SA, also pointed to the desire of Boeing and Airbus to deal with fewer suppliers and said the Smiths deal is a signal that the cycle of consolidation isn't over yet.

Although Thales isn't seen as a potential takeover target, analysts note that it competes directly with Smiths for avionics business and could target smaller acquisitions.

Aerospace suppliers that are considered candidates for takeovers include Cobham PLC, Meggitt PLC, Ultra Electronics PLC and Chemring Group PLC, all based in the U.K., according to analysts.

The likes of U.S.-based Honeywell International (NAS:HON) Inc., Rockwell Collins Corp. and General Dynamics (NYS:GD) Corp. have long been seen as potential buyers of European aerospace suppliers. Private-equity firms such as U.S.-based Carlyle Group LP and European players like Cinven Group Ltd. have also shown interest in European aerospace assets.

-- David Pearson in Paris contributed to this article.

Write to Rod Stone at rod.stone@dowjones.com

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