Following months of high-profile and tense negotiations that featured multiple conversations between GE’s chief executive Jeffrey Immelt and French President Francois Hollande, the proposed purchase of Alstom’s power generation division by GE is set to be sealed. After initial opposition to the bid over fears that it would put French jobs and economic benefits at risk, both the board of Alstom and the French Government have publicly recommended that the proposed $17bn offer for the majority of the division be accepted.
Over the course of the negotiations the deal has changed. Originally, GE wanted to purchase the entirety of Alstom’s power generation operations, whereas under the new deal it will take full ownership of the global coal and gas-fired turbine operation, while entering into three separate 50-50 joint ventures, with Alstom covering the areas of power grid, renewable and nuclear turbines.
In a further change, hailed by the government as a victory for French interests, the French conglomerate and major Alstom shareholder Bouygues has agreed to sell a 20% stake of Alstom to the government, although the option to buy will only open after the deal has been completed. In order to further preserve the value afforded to the country, GE must also follow through on its commitment to create 1,000 new jobs in France over the next three years.
Beating out the competition
The deal may not marry up with the original objective of the US power giant, but it still represents a significant step forward, with the deal receiving a broadly positive reception from shareholders and market analysts. At the same time, it has enabled GE to get one over its two major competitors, with a competing bid put forward by Siemens and Mitsubishi Heavy Industries, originally expected to receive the backing of the French government, failing to succeed.
For Siemens, the failure of its joint bid with Mitsubishi Heavy Industries has left it soured. In a letter to staff, Siemens chief executive Joe Kaeser claimed that Patrick Kon, current Alstom chief executive, had acted all along to limit the company’s involvement. Siemens is the second largest player in the gas turbine market behind GE. While GE dominates its domestic market, Siemens has a far larger share of the European market. The acquisition of Alstom by GE could significantly shift that balance of power.
The US Environmental Protection Agency has been accused of ‘waging a war’ on coal.
Commenting on how the German engineering firm might respond to the defeat, Moody’s lead analystRoberto Pozzi suggests that there are both positives and negatives: "I think the best way to respond for Siemens is continue with what they’re doing in terms of restructuring, which is what their shareholders will probably push for. In terms of market share, they will probably benefit and there will be market consolidation that Siemens will benefit from without having to pay the price for it."
A good deal for all
Upon the announcement that it had received the backing of both the government and the Alstom board, GE chairman and chief executive Jeffrey Immeltcommented thatthe deal was "good for France, Alstom and GE".
French economy and industry minister Arnaud Montebourg said the revisions to the deal would ensure the country’s interests are protected: "This is a way of organising ourselves in the face of globalisation. It builds alliances rather than allowing France to become a giant shopping centre for foreign corporations to come and prey on our companies."
For GE, the acquisition of the coal and gas-fired turbine business constitutes a significant victory that will enable it to pursue new growth areas. "By doing that they gain access to some interesting technologies and they also get access to Alstom’s customer base in France and also emerging markets where Alstom is selling steam turbines and coal fire technologies," saysPozzi.
While the coal power market, in which Alstom still packs significant punch when compared with the decline it has experienced in its gas turbine operations, is under threat from the shift towards more environmentally friendly fuel sources, it remains a popular power source, particularly in emerging markets. For GE, the purchase will increase its footprint in the coal power sector, but also put it in prime position to assist Alstom’s coal clients should they transition away from coal in favour of alternative fuels. "Alstom is selling steam turbines and also coal fire technologies to customers that probably will increasingly shift to gas or renewables over the coming years and decades," says Pozzi.
Financial analystTrefis also seesthe value of the steam turbine operations at Alstom in relation to exploiting growth markets. "Alstom will fill this gap well in GE’s portfolio, as its steam turbines are not only highly advanced but also have a large installed base in Europe," the company said. "Acquisition of Alstom’s steam turbine business (that lies outside of France) will also help GE expand its presence in the coal-fired power plant market, which is growing rapidly in many regions of the world, especially China and Africa."
Partnering up to explore new technologies
In addition to the gas turbine business going to GE, the US company will also take a 50% share in three joint ventures with Alstom covering renewable, power grid and nuclear technologies. While these arrangements are not what was originally intended, the JV approach will enable GE to expand its footprints in those markets while the French government can retain influence over politically sensitive technologies, particularly nuclear turbines.
According to Standard & Poor’s senior director Dan Piccioto, the government involvement is unlikely to disrupt operations. "We do not anticipate the French government involvement in the JVs to meaningfully alter how they operate or perform," he says. "These joint ventures, along with the sale of its signaling business to the remaining Alstom, represent the most significant changes to the deal."
While the creation of the jointventures represents the largest change to the deal, it is not without its benefits. "Obviously the JVs result in a smaller cash outflow to purchase the assets, which reduces some risks from the credit perspective,"Piccioto notes.
While a number of challenges remain toensurethe deal proves to be a positive step forward for GE, Picciotobelieves the early signs are positive, provided the companies can successfully integrate their operations: "The combination will strengthen [GE’s]leadership position in the gas turbine market, increase its scope of power plant offerings, expand its renewables offering, and the combined grid businesses should be more formidable."