Over the weekend, General Electric (GE) announced that the Alstom Board of Directors has unanimously approved GE’s offer to buy the Power and Grid businesses of France-based Alstom. The US-based industrial giant’s bid prevailed over that of a convoluted offer from a Siemens (SI) and Mitsubishi consortium that had hoped to spoil the tie-up and prevent GE from strengthening its presence in Europe.
Here are the details of the GE-Alstom transaction:
GE’s offer to acquire the Power and Grid businesses of Alstom remains unchanged at $13.5 billion (€9.9 billion) enterprise value and $3.4 billion (€2.5 billion) of net cash, totaling $16.9 billion (€12.35 billion). The all-cash transaction is valued at 7.9 times pro-forma earnings before interest, taxes, depreciation and amortization (EBITDA) of Alstom’s Thermal, Renewables, and Grid business units.
Once closed, GE and Alstom would form three joint ventures:
Grid: the combined Grid assets of GE and Alstom
Renewables: Alstom’s Off-shore Wind and Hydro businesses
Global Nuclear and French Steam: Alstom’s production and servicing of equipment for nuclear power plants, and development and sales of new nuclear equipment around the world; and Alstom’s steam turbine equipment and servicing for applications in France.
The cumulative cash investment by Alstom in the joint ventures would be about $3.5 billion (€2.6 billion) and is valued at a higher multiple (pro forma EBITDA) than GE’s purchase price multiple. Including this purchase by Alstom, GE’s total net cash outlay for the transaction is $10 billion (€7.3 billion).
In addition to the joint ventures, GE has signed a memorandum of understanding to sell its Signaling business to Alstom for approximately $825 million (€602) and to enter into multiple collaboration agreements involving services, technology, supply chain, manufacturing, and commercial support in the U.S.
Though the Alstom situation dominated news headlines for months as GE, Siemens-Mitsubishi, and the French government worked to push their respective agendas, GE ended up being the biggest winner.
First, GE will scoop up valuable energy assets at ~8 times EBITDA, a multiple we view as very reasonable. Second, the transaction preserves GE’s synergy target of $1.2 billion annually by year 5, and the deal will be accretive to earnings in the first year. Third, it gives GE a stronger presence in Europe, and the rapidity at which Siemens and Mitsubishi came together for a counter offer indicates that GE is certainly onto something. Still, it may be a few years before we really get a handle as to why executives were scrambling to make a deal.
On the downside, the JV structures—outlined above—will complicate the discounted cash-flow analysis related to the US-based industrial giant, but we’re generally pleased with GE’s focus on growing its industrial presence and shrinking its higher-risk financial operations. As we’ve outlined many a time before, industrial orders at GE continue to come in at a breakneck pace, pushing backlog to all-time highs. Also, the deal with Alstom is not exactly how we would have preferred, as the French government will have a stake in the entity, which could reduce operational flexibility if political motivations intrude. However, it’s very likely GE had no choice in the matter.
The deal is expected to close in 2015, and we’d expect more information when GE reports second-quarter results July 18.