Alstom Acquisition Will Strenghten GE’s Power Business But Roadblocks Exist In Deal Completion

General Electric (NYSE:GE) announced last week that it has submitted a $17 billion binding offer to acquire the power and grid businesses of French corporation, Alstom. ^[1] We figure this acquisition will significantly enhance GE’s power business both technologically and geographically, especially in Europe. In addition, it would also advance the ongoing shift in GE’s portfolio towards its industrial segments.

Currently, GE generates about 55% of its earnings from the industrial businesses with the remaining coming from its financial businesses.  The company seeks to raise this share of industrial businesses to 70% in its earnings-mix by 2015 end. Additionally, among its industrial businesses, power, aviation and oil & gas are the biggest segments and also the key drivers of the company’s growth. For instance, in the first quarter, revenues and profits across these three segments grew in double digits, while they contracted at other GE industrial segments including healthcare, transportation, appliances and energy management. We figure acquisition of Alstom’s power and grid businesses will bolster GE’s power business as the global demand for power generation is rising, especially from the emerging countries. GE and Alstom through their turbines, which harness energy sources such as coal, gas and wind for power, are seeking to capture as large a share as possible of this growing global power generation capacity.

We currently have a stock price estimate of $26.20 for GE, marginally below its current market price.

See our complete analysis of GE here

GE Will Strengthen Its Power Business With The Alstom Acquisition

GE and Alstom’s power businesses are highly complementary. While GE is a leader in gas turbines, Alstom has a strong portfolio of coal-based turbines. Additionally, both players apart from manufacturing turbines also provide other equipment and services to a variety of power plants based on steam, hydro, coal, gas, nuclear steam and wind. GE says that a combination of the power portfolios of the two companies will be more competitive as power plant customers are increasingly buying total power plant solutions. Separately, Alstom’s extensive presence in the European market will significantly expand the geographical spread in GE’s power business. In addition, as coal-fired power plants are more popular in the fast growing emerging markets, GE through Alstom’s coal-fueled turbines will benefit from this rapid growth.

The two businesses are also of comparable sizes. While GE’s power business constitutes the bulk of its power & water segment, which had revenues of $24.7 billion and operating profit of nearly $5 billion last year. Alstom’s power business had $15 billion in sales and $1.4 billion in income from operations in fiscal 2013, which ended on September 30, 2013. ^[1] On its part, Alstom’s board has positively received GE’s offer and has appointed a committee to review the offer within a month.

Additionally, apart from power business, GE has also offered to buy Alstom’s grid business, which provides equipment and services for the build out of power grids in the emerging markets. We figure this business also has huge growth potential as emerging countries are likely to continue expanding their grid infrastructures through the next two to three decades. For instance, China’s per capita electricity consumption even after nearly two decades of rapid capacity addition is about a fourth of the U.S. While India’s per capita electricity consumption is less than a tenth of the U.S. ^[2] Thus, as these major developing economies add electricity generation capacities in the coming years, they will also expand their grid infrastructures, creating growth opportunities for companies such as Alstom. In size, Alstom’s grid business is smaller than its power business. It had revenues of $5.2 billion and income from operations of $0.3 billion last fiscal. ^[1]

Separately, apart from strengthening GE’s power business, this acquisition will likely also help GE save on taxes. According to sources cited by Bloomberg, GE has roughly $57 billion in its foreign cash reserves and this deal will help the company utilize these reserves, preventing it from needing to bring this cash back to the U.S. where it will be taxed at a higher rate. ^[3]

Opposition From The French Government & Siemens Could Upset The GE-Alstom Deal

However, significant roadblocks to this deal exist. French Economy Minister Arnaud Montebourg on May 6, in a letter to GE CEO, Jeff Immelt, said that the government of France will not support the deal in its present form as the acquisition will leave Alstom diminished. After selling its power and grid businesses, Alstom will be left with its train business which constitutes only about 30% of its overall revenue. The French minister has instead proposed that GE could in return of Alstom’s power and grid businesses sell its own locomotive and rail signalling businesses to Alstom, which makes France’s iconic bullet trains, the TGVs. As Alstom is also a key component supplier to France’s nuclear industry, the French government could invoke its laws that prevent sale of strategic assets to foreign companies. We figure in that case GE may have to settle with Alstom’s power and grid businesses devoid of its nuclear operations.

Separately, German industrial giant Siemens, which is a major competitor of both Alstom and GE in the power and transportation sectors, has also evinced interest in Alstom. The company has sought a closer look at Alstom’s books before submitting a binding offer like GE. We figure an offer from Siemens could raise the price for GE as gains to be had from this acquisition are large. In addition, in case Siemens decides to submit a bid, it will likely receive greater support from the French government as Mr. Montebourg has specified that they will prefer a European buyer.

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1. GE offers $13.5 billion enterprise value to acquire Alstom Thermal, Renewables, and Grid businesses, April 30 2014, www.ge.com [↩] [↩] [↩]
2. List of countries by electricity consumption, April 30 2014, www.wikipedia.com [↩]
3. GE Poised to Tap $57 Billion Overseas Cash in Alstom Deal, April 24 2014, www.bloomberg.com [↩]