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of $13bn, i.e. c.€30 per share. Alstom’s transportation division could however be excluded

from any potential deal according to Le Figaro. Alstom issued a press release saying that

while it is not aware of any potential public offer for Alstom shares, the company constantly

reviews the strategic options for its business. Assuming an offer price of €30 per share for

the whole group, this would value the company at a 15x P/E and an 11x EV/EBIT based on

our FY 2014/2015 estimates. Excluding Transportation (which we value at €6.5/share),

implied multiples would be around 20% higher.

* SG view We believe that such a deal would make strategic sense for all parties involved.

Bouygues would probably be a happy seller of its 29% stake, as it has considered Alstom as

non-core for a few years (valued at €33.7/share in its own books), while Alstom could see the

transaction with GE as a decisive solution to solve its financial issues. For GE, we believe the

fit looks very good: 1) It offers the opportunity to create an undisputed leader in the thermal

service and retrofit market (Alstom has supplied equipment present in 25% of the global

power installed base). 2) GE already tried to take over the Transmission business in 2010 in

order to rejuvenate its own subscale grid automation business. 3) Alstom Transport business

would enable GE to achieve its objective of shifting from a US rail business to a global

transportation equipment and solution provider. We see no major hurdles to the transaction.

We estimate French political opposition should remain limited given the combined entity

could better protect jobs in France than Alstom standalone. We also believe a counterbid

from Siemens is unlikely given the prospects of antitrust issues in Europe.

* How we value the stock We believe the probability of the deal being finalised is high and

apply a 60% weighting to such a scenario. As a result, we raise our target price to €28,

which is the mix of a takeover price of €30 and our standalone valuation (€25, derived from

the combination of a SOP and a DCF assuming a long-term margin of 6.5%).

* Events, catalysts & risks FY13/14 results on 7 May. Downside risks: greater pressure on

prices, slower-than-expected divestment programme.

* Upgrading our long-term return targets due to lower cost of equity 

We expect a continued and now larger decline in the equity risk premium to the end of 2016, feeding through to a lower cost of equity and therefore a higher P/E multiple. Our new forecasts for STOXX 600 are 410 and 450 for end-2015 and 2016 respectively (compared to 380 and 400 previously).

* Risk of a drawdown has increased

While we remain constructive on equities, we believe the risk of a drawdown has increased as the valuation cushion is now smaller. Our risk model based on the level of valuation and volatility suggests a 21% probability of ma 10% drawdown. Also, geopolitical risks might increase.

* Long-dated call option prices look low in Europe

To gain strategic exposure to equities while limiting downside risks, investors can buy long-dated call options. Those look attractive in Europe currently due to relatively low implied volatility and very low forward prices. This also presents an opportunity to re-risk in equities for capitalconstrained investors such as pension funds and insurance companies.

There may be merit in a bid for the French company

Spending limits are nice in theory but, as any avid shopper will tell you, tough to stick to in practice. GE chief executive Jeff Immelt said this month that he was looking for acquisitions in the $1bn to $4bn range. A rumoured $13bn bid for all, or part, of French power and transport systems business Alstom would come in well ahead of that. Does Alstom merit a break in Mr Immelt’s self-imposed frugality?

Not at first glance. Alstom’s orders fell almost a tenth in the first nine months of the fiscal year. Its thermal power and grid businesses are weak. At the start of this year Alstom said free cash flow would be negative in the second half. Net debt is expected to have grown 40 per cent over the year as a whole. Yes, an acquisition by GE would bring scope for cost savings but with half of Alstom’s 93,000 employees located in Europe, achieving these savings would be delicate. Hiving off the politically sensitive rail business would help.

Still, GE would not be paying top dollar for Alstom. At $13bn (against a pre-rumour market capitalisation of $10bn), the French company’s equity would be valued at 13 times net earnings for the year just started. GE trades at over 15 times. And there would be industrial logic. In addition to any cost savings, analysts at Barclays say GE would benefit from Alstom’s positions in offshore wind and power transmission.

Although Alstom is larger than GE’s ideal target size, it would not be too big a chunk for the company to digest. It would add 18 per cent to GE’s revenues but just 8 per cent to earnings before interest, tax, depreciation and amortisation. Financing the deal would not be a stretch for GE, although ability to pay is not, in itself, a good reason to buy. In this case though, the opportunity to take out a competitor in the power systems market looks like a good one.

Tate & Lyle shares gained yesterday, 24 April on renewed gossip that the listed UK-based sugar producer had attracted predatory interest from rivals, the Ft.com website reported. The Ft.com market report section mentioned speculation regarding a takeover bid for Tate & Lyle from the listed White Plains, New York-based agribusiness company Bunge, but did not cite a source for the rumour.

A market report in The Daily Mail mentioned talk that Bunge could be about to table an 850p per share bid for Tate & Lyle, which would value the company at GBP 3.9bn (EUR 4.73bn). The newspaper did not cite a source for the rumour.

Dealers cited by the Daily Mail article believed that Minneapolis, Minnesota-based Cargill, a privately owned agribusiness, has also been thinking about making an offer for Tate & Lyle.

A market report in The Times noted talk that Bunge might offer 800p per share for Tate & Lyle, but did not cite a source for the rumour.

The Ft.com report said Bunge’s corn processing and bulk sugar business is relatively weak, while those businesses account for about 70% of Tate & Lyle’s sales.

Tate & Lyle’s share price closed 12.5p up at 669.5p in London yesterday, giving the company a market capitalisation of GBP 3.11bn.

Source FT.com, Daily Mail, The Times