France’s SAFRAN Group has agreed to acquire 81 percent of General Electric‘s [GE] Homeland Protection business, giving it a portfolio of security products used for explosives detection to go with its identity management solutions in the global homeland security space.
SAFRAN’s definitive agreement with GE calls for a cash payment of $580 million. Under terms of the deal, GE will maintain a minimum ownership stake in the homeland business for at least three years. The transaction is expected to close in mid-2009, pending completion of regulatory approvals, including the Committee on Foreign Investment in the U.S. and anti-trust and competition approval in Europe.
Ever since GE’s proposed joint venture with the security business of Britain’s Smiths Group collapsed in the fall of 2007, industry officials and analysts have been speculating that GE’s homeland business would probably be sold. The business unit’s sales have been steadily declining the past several years.
SAFRAN says that GE’s Homeland Protection business had $260 million in sales last year. When the proposed joint venture with Smiths Detection was announced early in 2007, the business unit reported $330 million in sales for 2006. That amount was well below the $400 million-plus sales of the former InVision Technologies, the computed tomography-based explosives detection systems business GE acquired in late 2004 for $900 million. Prior to the InVision purchase, GE acquired the explosives trace detection company Ion Track in 2002, launching its foray into homeland security.
Since making those acquisitions, GE Homeland Protection has also begun expanding into chemical, biological and radiological detection markets, creating new handheld devices and winning various development contracts.
Plans to Bolster Homeland Business
Frost & Sullivan defense analyst David Fishering says that SAFRAN is getting a “great buy” at a great price.
“The fact that the company [GE] just sold a business they paid $900 million for in 2004 plus additional handheld and trace detection technologies for $580 million in 2009 highlights how devalued homeland security has become in the current climate,” Fishering says. “The people at GE Homeland Protection should be thrilled with the acquisition. SAFRAN has already make plans for its security business, now bolstered by the GE acquisition, to become 20 percent of its total business. The goal here is to help offset cycles in the aviation industry. This means that GE Homeland Protection should receive much more support and internal investment than it was receiving as part of GE, where the business was only a tenth of a percent of GE’s total revenue.”
SAFRAN, through is Sagem Securite subsidiary, is one of the leading technology providers in the identity management space, offering biometric matching software, credentialing and access control products. The company provides the fingerprint matching software for the U.S. FBI’s Integrated Automated Fingerprint Identification System, is involved in other identity management solutions worldwide including airport security, and recently acquired the biometric software matching business of Motorola to expand its footprint in this country. Sagem is also providing biometric-enabled smart card readers under the Transportation Security Administration’s (TSA) Transportation Worker Identification Credential program.
GE Homeland Protection’s core products are its family of CTX explosives detection systems (EDS), which are used at airports worldwide to automatically screen checked luggage for explosives. The installed base of 1,600 machines generates service revenues making up 60 percent of the business units overall sales. The TSA recently certified GE’s newest EDS system, the CTX 9800, which is expected to offer the highest image resolution and baggage throughput in the industry.
GE’s longer-term position as one of the world’s leading suppliers of EDS machines for checked baggage screening, certainly in the U.S., is unclear. TSA has contracts with several companies investigating EDS systems with fewer moving parts in attempt to cut down on the costly maintenance expense associated with the current systems.
However, Dennis Cooke, the president of GE’s Homeland Protection business, recently told TR2 Daily that the new 9800 system, which features more detector rows, will offer plenty of competition to the so-called next-generation EDS systems which he said will require more X-Ray tubes and detectors to equal the imaging capabilities of the GE system. Those are parts that need to be frequently replaced now, he says.
GE also supplies explosives trace detectors used by TSA at airport checkpoints and for checked baggage screening.
Nearly 70 percent of GE Homeland Protection’s revenues come from U.S. customers, mainly the TSA, while 23 percent of sales are in Europe and 8 percent in Asia. Sagem Securite on the other hand does most of its business in Europe.
Combined with its identity management products and software, SAFRAN said the GE deal will allow it to offer airport customers a more complete package of security solutions. GE’s Cooke tells TR2 that in time GE and Sagem will be able to explore technology integration where airport security systems can be enhanced by better linking explosives detection to identity management, moving further towards the checkpoint of the future.
SAFRAN also says that the market in Europe for EDS should grow beginning in 2012 when new regulations in Europe require computed tomography-like detection equipment to be purchased for airport screening. Those laws require full replacement of equipment by 2018. SAFRAN estimates that the explosives and narcotics detection market today is worth $2.4 billion.
Terms of the pending deal with GE allow the Homeland Protection business to continue to have access to GE’s Healthcare and Global Research Center (GRC) businesses. The healthcare business, which is a leader in computed tomography for patient imaging, is a source of innovation for the CTX systems while the GRC has been leading the way in helping the Homeland Protection business enter the nuclear detection market.
Cooke will continue to lead the Homeland Protection business, which will remain headquartered in California. GE will retain a seat on the board of directors of the business.
Citigroup [C] and J.P. Morgan [JPM] served as GE’s financial advisors on the transaction.