GE-Alstom Deal: GE Willing To Make Concessions As EU Commission Raises Antitrust Concerns

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General Electric

General Electric (NYSE:GE) recently received a list of competitive concerns from the EU Commission pertaining to the company’s acquisition of majority of Alstom’s energy business. The intent to acquire the business was confirmed last year in an announcement when Alstom’s board unanimously picked GE’s bid for majority of its power and grid businesses for an enterprise value of $13.5 billion. The EU Commission is now raising concerns about the impact this deal would have on the competition within the industry. The commission is concerned that upon the completion of this deal only two strong competitors, General Electric and Siemens, will remain in the industry in Europe. General Electric is currently contemplating the concessions it could make to make this deal go through. It is important to note that the EU Commission sending a list of concerns to an acquiring company is standard procedure and doesn’t necessarily mean that the deal will be blocked from going through. The final result of the deal will be largely dependent on the steps General Electric takes to address the Commission’s concerns. This deal is an important step for GE in strengthening its industrial portfolio as it divests majority of its financial services business.

We currently have a price estimate of $27.81 for GE’s shares, approximately in line with its current market price.

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There are several factors that make this deal an important win for GE. These include the existence of complementary technologies between the two companies, the opportunity for improved joint capabilities and big cost synergies. In a presentation made in May, GE quantified the synergies created by the Alstom deal. The company anticipates an additional $1.8 billion in cost savings by this deal, over the $1.2 billion estimated in May 2014. Over 40% of the additional cost savings is expected to come from SG&A consolidation due to this deal. Another 40% is expected to be derived from improved manufacturing capabilities with the merger of Alstom’s Power and Grid businesses with GE. The remaining 20% is expected to be derived from better utilization of technical resources and better run services. The good news for investors lie in the impact these cost synergies are expected to have on GE’s EPS in the future. The company forecasts its EPS to move from $.06-$.09 in 2016 to $.15-$.20 in 2018. ((General Electric – Valuable Industrial Company, General Electric))

These numbers put into perspective GE’s eagerness to defend the deal and consequently make concessions to eliminate the EU Commissions concerns that could potentially block the deal. However, the company will be reluctant to take up concessions that dilute the value-addition brought about by this deal. GE’s CEO has expressed the company’s willingness to sell off intellectual property to address the Commissions concerns, but has made it clear that concessions around Alstom’s service business was not something GE was willing to do. [1] GE has already pledged to create 1,000 engineering and manufacturing jobs in France, besides maintaining certain production lines in France along with supporting Alstom’s high-speed rail unit in France to placate the French government’s concerns about the merger. [2] GE and Alstom have two months to reach a compromise with the EU Commission, which has a deadline of August 21st, 2015 to give its final word on this merger.

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Notes:
  1. European Commission Sends Concerns to GE Over Alstom Energy Deal, The Wall Street Journal []
  2. GE to Weigh Concessions on Alstom Deal as EU Regulators Balk, Bloomberg Business []