General Electric’s Jeff Immelt, an archetypal US chief executive from his love of (American) football to his Harvard MBA, has often seemed something of a fish out of water in France.
Announcing GE’s revised offer for Alstom’s energy businesses in Paris on Thursday, though, he could afford to laugh about the cultural divide. As his words were laboriously translated, he joked: “If I had known about this, I would have taken French at school.”
In spite of Mr Immelt’s lack of language skills, GE seems to be making progress in assuaging the French government’s opposition. A senior French official described its offer as running “neck and neck” with the rival bid from Siemens of Germany and Mitsubishi Heavy Industries and Hitachi of Japan, but GE’s revised proposal meets many of the concerns that the government has raised.
There are some outstanding questions over the deal, including its valuation, but if it does go through on the proposed terms it would still look like an attractive piece of business for GE, analysts say, even after the concessions that Mr Immelt has made.
The reason is that while the French government has been a central actor in the drama of the bid battle, the motives for the deal have very little to do with France.
Alstom is a global company that earned 90 per cent of its revenues outside France last year, and 67 per cent outside western Europe. The big opportunities for growth are not in developed countries, but in emerging economies in Asia, Africa and Latin America that have fast-growing demand for electricity.
The changes GE has made to its offer to answer concerns about issues such as job creation and control of technology for nuclear plants have made the deal more complex.
Instead of an outright takeover of Alstom’s energy operations, as first proposed in April, GE is now planning to leave parts of them in three new 50/50 joint ventures: one for grid equipment, one for renewable energy, and one for steam turbine technology for nuclear plants.
It is also offering to sell its rail signalling business to Alstom, which would become principally a train company, and promising to create 1,000 jobs in France over the next three years.
However, Mr Immelt argues the heart of the deal as it was originally conceived is intact.
The real prize is the businesses GE would own outright, particularly the operations outside France manufacturing and servicing steam turbines used in coal-fired and gas-fired power plants. That would give GE a stronger position in coal-fired generation as well as its traditional base in gas-fired power. It would also enable GE to create a combined network to service the two companies’ installed base of plants around the world.
Mr Immelt says that 86 per cent of the cost savings expected from the deal, rising from $300m in the first year to $1.2bn by the fifth, will come from Alstom businesses that will be wholly owned.
GE’s successful record with CFM, its aero engines joint venture with Safran of France, has encouraged hopes that similar partnerships might also be effective.
The sale of the signalling business, meanwhile, is only a footnote to the main transaction. GE does not report its revenues or earnings separately, but it is part of the rail management business that had sales of about $500m in 2011. The Alstom energy operations have annual revenues of about $20bn.
Final judgments will have to wait until GE has filled in some of the blanks in its proposal, including the cash cost of the new offer.
“It’s still a bit muddy,” says Christian Mayes at Edward Jones. “They haven’t given us a lot of specifics.”
The company says the valuation it originally put on the Alstom businesses in April, giving an enterprise value of $13.5bn, remains unchanged, but the final price for the deal will be reduced by the agreed values of the operations included in the joint ventures, which have yet to be determined.
However, the original price looked attractive at about eight times pro forma earnings before interest, tax, depreciation and amortisation, and providing the valuation does not depart too much from that, it is also likely to be welcomed by investors. GE’s shares rose about 1 per cent to $26.93 after the new offer was announced.
Daniel Holland, an analyst at Morningstar, says completing the Alstom deal will mark an important step for Mr Immelt’s strategy of reducing the group’s reliance on GE Capital, the financial services division, which provided 47 per cent of its earnings last year.
When the North American retail credit business is spun off as a new company called Synchrony Financial, in a process scheduled to start this year, and if the Alstom deal is done, GE would by 2016 cut the share of its earnings coming from financial services to just 25 per cent.
Mr Holland said that would be welcomed by shareholders. “If an investor wants exposure to GE’s great franchises in industrial businesses, at the moment they have to have exposure to financial services, too,” he says. Reducing the group’s reliance on GE Capital would enable investors to decide for themselves how much exposure to financial services they wanted.
Mr Mayes cautions, however, that investors should not harbour unrealistic expectations about Alstom being a transformational deal for GE. Although in dollar terms it would be the company’s largest acquisition, it would still be worth only 5 per cent of GE’s market capitalisation.
While success or failure will make a big difference to Mr Immelt’s prestige, it may make rather less of a difference to the fortunes of GE.