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.