UPDATE: Carlyle could steer Allison to military contracts

June 27, 2007

Allison Transmission could ramp up military sales under ownership by Carlyle Group and another private equity firm, a local business leader said.

Although Indianapolis-based Allison emphasizes manufacturing truck transmissions, the company could see sales of transmissions for tanks and other military vehicles soar if Carlyle and Onex Corp. win an auction for the General Motors division, said Mike Hudson.

"In the long term, this is very attractive for the Allison Transmission operation," said Hudson, who retired in 2002 as vice chairman of Rolls Royce North America, known as Allison Engine when it was a sister company to Allison Transmission.

The Financial Times reported this morning that Carlyle, based in Washington, D.C., and Onex, of Toronto, have offered the most for Allison, and that as of last week, the parties were awaiting approval from the United Auto Workers.

The other bidders-a party that included Greenbriar Equity, Clayton Dubilier & Rice, and Berkshire Hathaway-pulled out of the auction. That left Carlyle and Onex as the winners, the newspaper said, quoting sources.

Allison likely will sell for about 10 times the $550 million its projected 2007 earnings before interest, taxes, depreciation and amortization, one of the sources said, although another source put the value at 7.2 times EBITDA.

At 10 times EBITDA, the sale price would come to about $5.5 billion.

Allison employs 3,400 in Indianapolis.

Under Carlyle, Allison would be required to earmark a smaller portion of revenue or profit for a central office, said Hudson, who now operates an Anderson startup that makes electric generators powered by methane gas. Shedding General Motors as a parent
likely would free up several percentage points of revenue.

Carlyle is known for its government and military ties, Hudson said. Until five years ago, its chairman was Frank Carlucci, a former defense secretary under president Ronald Reagan.

Carlyle probably realizes that the military would be interested in adopting Allison hybrid technology now used in buses, Hudson said. Prying Allison away from GM also would open markets at rival Ford Motor Co. and other truck manufacturers.

Moreover, Carlyle tends to keep its acquisitions rather than make changes and sell them after a few years.

Hudson said he would expect Carlyle to possibly shed some jobs early in the acquisition process, and then solidify the operation as it built its contract base.

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