Alstom plays down added layer of complexity in deal with GE
FILE PHOTO: Patrick Kron, chief executive officer of Alstom SA, pauses during a news conference to announce the company's results in Paris, France, on Wednesday, Nov. 7, 2012. General Electric Co. (GE) is in talks to buy Alstom SA, the French builder of trains and power plants, people with knowledge of the matter said, in what would be GE's biggest acquisition ever. Photographer: Balint Porneczi/Bloomberg *** Local Caption *** Patrick Kron©Bloomberg
It was not the deal Patrick Kron wanted. The chief executive of French industrial champion Alstom had planned a clean €12.35bn sale of its energy business to General Electric before the Socialist government got involved.
The state complicated the issue, forcing the creation of three joint ventures with GE and is also set to take a stake in Alstom, to the disquiet of investors. Shares in Alstom are down 6 per cent since the start of June as the new deal emerged.
“A simple deal has been blurred,” says Jean Medecin at French asset manager Carmignac Gestion. “A ménage à trois between Alstom, GE and the French government may not be the easiest way to manage a company.”
But Mr Kron says that despite the added layers of complexity, investors should not be worried. The fundamentals of last month’s deal are the same as GE’s initial offer in April: selling Alstom’s energy assets for €12.35bn and leaving the maker of the famed TGV trains as a pure play transport business.
The fact that it will also pay €2.5bn to have a 50 per cent equity stake, but no operational control, over three other joint ventures in grid, renewables and French steam and nuclear is by the by as it can sell the stakes with a floor price of €2.5bn.
“The current share price is not fairly reflecting the value of the company from any angle you look at it,” says Mr Kron. “As we move forward the shareholders will see there is no reason to put a discount on a scheme that makes sense.”
He says that in future the joint ventures could be sold in an initial public offering or in the open market, and because of the floor price Alstom could only gain from the success of the joint ventures.
In depth
Analysts at JPMorgan argue that the stake is in fact worth €2.1bn, partly because the government could object to it being sold, a charge that Mr Kron rejects. Mr Kron says he does not need GE or anyone’s permission to sell the shares.
“I get something that has upside potential, and which is protected against loss,” he says. “We will see where we are.”
Mr Kron also refutes the idea, highlighted by GE in a statement about the deal, that Alstom has in effect paid a higher multiple for the joint ventures’ stakes than GE did: “This is not true . . . It [the multiple] is in the same ballpark.”
Complexity of the revised deal aside, the big question is how the new transport-focused business will fare against larger players such as Bombardier, Siemens or the Chinese giants CNR and CSR.
Critics of the GE offer, when it emerged in April, said the deal would leave a transport-focused Alstom too small and weak to compete. But this claim is rejected by Mr Kron.
“When I was trying to organise an initial public offering of Alstom Transport [last year] they accused me of selling the family jewels. Now they are saying it has no long-term viability – why has this changed?” he says.
“I have no doubt about the viability of the transport business,” says Mr Kron, adding the business had more than “€5bn in sales, five years of [order] backlog and the potential to improve margin as well. Why should we have a problem there?”
Analysts tend to agree with Mr Kron on this point. “[The business] harbours the prospect of steady sales and margins growth, underpinning its status as a solid business,” says Alfred Glaser, analyst at Oddo Securities.
The group is also set to be strengthened by the proposed sale of GE’s signalling operations to Alstom, which had sales of about €400m last year, along with the plans for a broader global alliance with GE in the rail business.
The transport-focused group will also be left, assuming the regulatory hurdles can be cleared, with an undisclosed amount of cash which the company says it will use to help pay off debt and fund acquisitions.
“Transportation is strategically more strongly positioned than its energy businesses,” say Moody’s, the rating agency.
A critical JPMorgan note said it “liked” the transport story, if not the joint ventures.
Mr Kron says he is trying not to dwell on the deal that might have been, but looking at making the joint ventures and the transport business work. “There are things I like [about the deal], there are things I don’t like. That’s life,” he says.