French energy firm Alstom has been in the news a lot recently. From General Electric’s (GE) initial interest in the firm reported April 23 to Siemens’ (SI) offering to top GE’s bid April 27 to the French government politically opposing GE’s bid for Alstom’s assets May 5, the saga continues. As of the latest information available (May 6), Alstom continues to review both GE’s and Siemens’ respective offers:
The Board of Directors of Alstom announced…that it has received a binding offer from General Electric to acquire its Energy activities. The scope of the transaction includes the Thermal Power, Renewable Power and Grid Sectors, as well as corporate and shared services. With 65,000 employees, these businesses registered €14.8Bn in sales in fiscal year 2012/13. The proposed price is a fixed price representing an Equity Value of €12.35Bn and an Enterprise Value of €11.4bn, or 12.2x FY13 EBIT.
The Board also reviewed a declaration of interest received from Siemens, regarding an alternative transaction. Siemens will have a fair access to information needed to make, should it decide to do so, a binding offer. This declaration will be reviewed in light of Alstom’s corporate interest and the interest of all stakeholders, in accordance with the commitments made.
GE’s current proposed offered price for Alstom’s Energy activities isn’t a steal at 7.9x pro forma EBITDA, but it is a good price and the potential for synergies across overlapping business lines makes the numbers work really well. GE and Alstom have complementary offerings in Power and in Grid (shown below), and we think these are the areas where the most synergies can be extracted. GE expects $1.2 billion in annual cost synergies by year 5:
1) In Thermal Power, Alstom and GE have complementary offerings in steam turbines and gas turbines technology. Alstom will add balance of plant and turnkey capabilities to enhance the combined entity’s power offerings;
2) In Wind Power, Alstom is small in onshore wind with a competitive offering in offshore wind while GE is focused on onshore wind;
3) In Hydro Power, Alstom is a prominent global player and GE is not present;
4) In Service, Alstom’s comprehensive product portfolio is a perfect match with the global presence of GE.
5) In Grid, Alstom and GE are complementary in the products and solutions they offer and in their geographic focus. (source)
We also like that the proposed deal will increase GE’s industrial exposure and lessen its dependence on riskier financial dealings, which the conglomerate has been working to shed in recent years. GE expects the transaction to be immediately accretive to earnings (an incremental $0.08-$0.10 per share in 2016) and drive industrial earnings to 75% of its total business by that year.
If the deal with GE is completed as proposed, Alstom would retain its Transport division, which is a global leader in its own right in rail transport equipment, systems, services, and signaling for freight transportation. Siemens has been hoping to swap its own train assets and a cash payment for Alstom’s Energy activities. Siemens has also indicated that it will make guarantees for jobs, management positions and locations, a stance that appears to be more appealing to the French government.
The President of France Francois Hollande has weighed in personally, stating that GE’s offer, as is, is unacceptable due primarily to concerns about potential job cuts in France. GE, however, has stated that it expects net growth in jobs in acquired businesses in France, with a remix to more engineering and manufacturing. Though we doubt the French government has the power to stop a GE-Alstom transaction, it might be able to for “national security reasons” (Alstom was bailed out by the French government in 2004/5 and represents a core industrial asset for the nation’s energy independence).
Alstom’s board clearly has a lot to consider, and it has appointed a committee of independent directors to review GE’s proposed transaction by June 2. We’d like to see GE’s existing proposal completed, as structured, but we would not be surprised to see Siemens make a binding offer in the coming weeks to further complicate matters. We’re not changing our fair value estimate of GE at this time, and we continue to hold the global industrial conglomerate in the actively-managed portfolios.