Thwarted Immelt heads back to France
In the autumn of 2009 Jeff Immelt, chief executive of General Electric, flew to Paris twice in an attempt to secure government support for a bid for Areva’s power grid equipment business.
He failed. President Nicolas Sarkozy favoured a French solution, with the business shared out between Schneider Electric and Alstom.
Four years later Mr Immelt is trying to negotiate a bid worth about €10bn for Alstom’s power businesses, including the ex-Areva transmission equipment that he failed to buy in 2009.
His motivation is more than just wounded pride. Presenting the group’s first-quarter results earlier this month, Mr Immelt said he would be prepared to make an acquisition for more than $4bn if it offered excellent value and the potential for strong synergies with GE’s businesses. The Alstom deal has both.
Since it helped outmanoeuvre GE four years ago, Alstom has been buffeted by the fall in investment in power generation in Europe. Its shares have dropped 45 per cent since the end of 2009, and it is exploring a variety of ways to raise cash.
As a result, its energy businesses are available for an attractive-looking price. If GE ends up paying €10bn, that would be about seven times earnings before interest, tax, depreciation and amortisation, giving an immediate boost to GE’s earnings per share.
Shannon O’Callaghan, an analyst at Nomura, argues that ought to ease any investor concerns about the size of the deal.
“If Jeff Immelt had gone and bought something grotty for 15 times ebitda, people would have killed him for it,” Mr O’Callaghan says.
“But GE has cash and can take a longer view, and can do something with the business, so it’s an easier case to make.”
The fit between GE’s and Alstom’s businesses is excellent: GE is stronger in gas turbines for power generation while Alstom is stronger in coal power and grid equipment. Strengthening its coal power business would be a change of course for GE, which has been stressing its commitment to gas, but would hedge that position by allowing it to benefit from continued growth in coal use in emerging economies.
The most attractive part of the Alstom energy operations, though, is probably the service business looking after power plants, which accounts for about a quarter of its sales. Alstom has the world’s second-largest installed base of plants with about 900 Gigawatts of capacity, behind only GE.
Nigel Coe of Morgan Stanley says: “That’s a huge installed base of service revenue, and there will be synergies from putting its business together with GE’s.”
Alstom’s profitability certainly seems to offer room for improvement. The average operating margin in its energy businesses is 8.6 per cent, compared to 15.7 per cent for GE’s industrial operations last year. European labour laws, and possibly assurances made to the French government to buy support for the deal, may inhibit GE’s ability to restructure, but about 40 per cent of Alstom’s workforce – 92,900 strong at the end of last year – is based outside Europe.
GE’s size means that buying Alstom’s power businesses would not be a transformative deal. The suggested price is about 5 per cent of GE’s market capitalisation.
Nevertheless, it looks like an attractive use for GE’s excess cash. Most of the $57bn it holds in non-US subsidiaries is tied up in GE Capital, its finance arm, but Mr Coe of Morgan Stanley estimates it has about $10bn of overseas cash in its industrial businesses, which would incur a tax charge if brought into the US. With that cash plus its planned disposal proceeds of $4bn for this year, GE could fund the deal quite comfortably. It looks as though the principal obstacles will be political, rather than financial.