Smiths Group future under scrutiny after Rockwell merger speculation

The future of Smiths Group, the engineering and aerospace company, has become the subject of renewed speculation following reports it is in talks with Rockwell Collins, a US rival, that may lead to a £7.5bn merger.

A deal would create the largest avionics business in the world, with sales of £4bn. A move of this kind has been widely supported by analysts, who believe that there is much consolidation still to come in the industry, which Smiths might miss out on if it does not act soon.

Smiths yesterday refused to comment on whether it was in talks with Rockwell but acknowledged that the aerospace industry is still fragmented. It also noted that the North American market is the home of 50 per cent of its revenue.

Keith Butler-Wheelhouse, Smiths' chief executive, is understood to have said he wants to lead the consolidation trend, which may well include a deal with Rockwell. The tie-up would give the combined group some of the world's leading commercial and military customers, including Eurofighter and the Pentagon. Smiths is still integrating TI Group, after a merger last year in a £4.5bn deal.

Rockwell Collins, based in Iowa, will this month complete its demerger from Rockwell International, the £5bn electronic controls and communications company. It will have its own New York listing and an estimated market value of £3bn.

A merger between Rockwell and Smiths would be mulled by the competition authorities, but would be unlikely to encounter the problems of the proposed General Electric-Honeywell deal, blocked by the European Commission last week. A deal with Rockwell could be problematic because of demerger arrangements from its parent, which may include a tax payment of around £430m for any company that it merged with.

Separately, European member states, customers of GE and Honeywell and competitors will today receive details of GE's proposed divestments.