The acquisition of Ohio-based RELTEC is being financed from GEC's pounds 2.7bn cash mountain. The move is its first foray into the American telecoms market - the biggest in the world, accounting for half of all global traffic.
Lord Simpson, chief executive of GEC, described the purchase as "a good first step" and said the group planned to move quickly to build sales back up to the pounds 11bn level they were at before the BAe-Marconi merger.
GEC is paying $29.50 a share for RELTEC, which is 80 per cent-owned by the US buyout specialists Kohlberg Kravis Roberts. This represents two times sales of $1bn (pounds 610m) a year and a 36 per cent premium to RELTEC's closing price on Friday.
Once the deal is completed, half GEC's turnover will be in the US. Telecoms will represent about 60 per cent of group sales.
The RELTEC purchase will give GEC access to the "local loop" - the last- mile connection to domestic and residential customers that is growing at a phenomenal rate because of the explosion in data, video and voice traffic.
Lord Simpson indicated that GEC's next acquisition was likely to be a hi-tech US business supplying equipment for Internet access. But he also said he was keen to expand GEC's presence in Europe, particularly in the German telecoms market.
RELTEC has 6,600 employees, net debt of $490m and assets of $361m. The acquisition will lead to a goodwill charge of about $1.7bn taken against profits. GEC said the deal would be earnings enhancing from day one before goodwill.
GEC expects to achieve additional sales of at least pounds 500m by combining its transmission equipment business with RELTEC's presence in the local access market through telecoms operators such as Ameritech, AT&T and several of the US "baby Bells".
Following the Marconi defence electronics sell-off, GEC consists of three divisions - communications, information systems and a rump of businesses including its Hotpoint domestic appliances joint venture and Avery Berkel weighing machines, grouped together under the GEC Capital banner.
Although communications is likely to be the focus of GEC's growth, Lord Simpson said the group also aimed to build up the information systems division. This consists primarily of three US businesses - Gilbarco petrol pumps, Picker medical imaging equipment and Videojet, which together employ around 10,000.
Lord Simpson dismissed reports of a rift between himself and GEC finance director John Mayo as "fantasy" and "a load of nonsense". He said: "John is an exciting guy to work with who deserves a huge pat on the back. Personally, we also get on very, very well."
He said he remained hopeful that the pounds 7.7bn BAe-Marconi deal would escape referral to the Monopolies and Mergers Commission, but the RELTEC deal was not dependent on the defence merger being approved.
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