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General Electric Co. all but admitted defeat Thursday after submitting a final package of concessions to secure approval for its $41 billion acquisition of Morristown, N.J.-based Honeywell International Inc. that is expected to fall short of European Union regulatory demands. The proposed divestitures, which would have shaved Honeywell’s aerospace business revenues by $2.2 billion, include its regional jet engine division, air turbine starter-making facility and some of its avionics and non-avionics product line. GE also offered to “ring-fence” its GE Capital Aviation Services (Gecas) unit as a separate entity. The offer would separate the unit from Honeywell’s product line, but GE would still own and manage all of Gecas. According to GE, the European Commission, which is the EU’s executive service and antitrust authority, was pressing for the sale of “virtually all of Honeywell’s avionics business and its auxiliary power unit business.” In its own statement, the commission countered by saying that a clear structural separation of Gecas could have been an alternative to further divestitures of Honeywell’s product line, but suggested that GE was not prepared to pursue this avenue. “This shows you are never too old to get surprised,” said GE chairman and CEO Jack Welch, due to retire this year. “In this case, the European regulators’ demands exceeded anything I or our European advisers imagined, and differed sharply from antitrust counterparts in the U.S. and Canada.” GE said the divestitures in its final package, “in the unlikely event they were accepted,” would reduce Honeywell’s $25 billion revenues by 9 percent, and GE-Honeywell’s combined revenues by 1.5 percent. Forecasts for $3 billion in synergies would remain the same, although estimated increase in earnings per share for the first full year of combined operations would be revised down from 11 cents to 9 cents. No changes would be made to longer-term expectation that the deal would increase GE’s earning growth rate by one or two percentage points. “The proposed divestitures are far short of the European Commission’s demands, which seek billions more than the proposed GE divestitures,” the Fairfield, Conn.-based company said in a press statement. “GE is not optimistic that its proposal will meet with European Union regulatory review.” Both the EU and GE had aimed to find a solution to concerns that the deal would have created a vertically integrated company in a position to overpower the competition. The commission had been pressing for a clear structural separation of the unit, such as floating Gecas to GE’s shareholders, to ensure that the unit would operate completely independent of the parent company. The EU had targeted Gecas as one of its concerns, because of the potentially pivotal role the unit could play in extending the enlarged company’s market share. Welch said he and Jeff Immelt, GE’s chairman-elect, had always said there is a point at which they wouldn’t do the deal and the “European Commission’s extraordinary demands are far beyond that point.” In what is generally unusual for EU merger investigations, Welch entered the negotiations as they got down to the wire by meeting directly with European Commissioner for Competition Mario Monti two separate times the day before GE’s deadline to offer its last package. Welch also had a phone conversation with Monti before submitting GE’s final offer, a press official for GE in Connecticut said. It is yet unclear whether there will be any political repercussions felt in the days to come over the EU’s expected veto. The deal had already cleared U.S. and Canadian regulators with relatively light concessions, putting this deal in the lineup as the first involving two U.S. companies to fail solely on outstanding EU antitrust objections. In July, both the U.S. Department of Justice and the European Commission blocked the proposed $129 billion blockbuster merger of WorldCom Inc. and Sprint Corp. Roughly a year ago, Lehigh Valley, Pa.-based Air Products and Chemicals Inc. and Air Liquide SA of France abandoned their $13 billion acquisition of Britain’s BOC Group after failing to secure the green light from U.S. regulators. Under EU competition law, the commission must continue with its merger review procedure, which requires the agency to market test the concessions, draft a decision, consult an advisory group representing all 15 EU member states and formally adopt a decision by the 20-member board of the commission. Technically, there is some room to maneuver beyond Thursday’s lapsed deadline. GE could come back with another concession offer. But this would work only if the concessions so obviously addressed the EU’s objections that they would not require extensive market testing divestitures. Alternatively, to save face, GE could annul the merger terms. A press official for GE, however, ruled out either possibility. “This is our final offer to the commission,” said Louise Binns, from GE’s headquarters. “We’re waiting for the commission to make its decision.” The commission will continue with its market testing to formulate a draft decision. That decision will be sent to an advisory panel representing the 15 EU countries, currently scheduled to meet June 25. A formal decision will likely come at the commission’s weekly meeting July 3, scheduled in Strasbourg, France. Clifford Chance P�nder was GE’s legal adviser. Honeywell turned to Skadden Arps Slate Meagher & Flom. At market close, GE’s stock was up 2.11 percent to $48.86. Honeywell’s stock was down 12.21 percent at $37.10. Copyright (c)2001 TDD, LLC. All rights reserved.

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