* What happened
Alstom’s board has approved the revised GE offer. The French State has
confirmed that, subject to execution of definitive agreements for the
various alliances between GE, Alstom and the State, including the Global
Nuclear & French Steam Alliance, it will grant the required foreign
investment authorization. Bouygues has also agreed to sell a 20% stake in
Alstom to the French State. We downgrade Alstom to Neutral (was
Conviction List Buy) and change our 3-month target price of €36 to a 12-
month target price of €28.5. Since being added to the Conviction Buy List on
May 2, 2014, the shares are down 5.9% vs the FTSE World Europe up 3.1%.
* Current view
We assume that the current Energy deal with GE as accepted by the board
goes ahead (subject to outstanding contingencies) and value Alstom at
€28.5/share. We value Alstom (Transport assets inc. GE Signaling) post
deal on 9x CY15/16E EV/EBIT. We believe Alstom’s competitive positioning
slightly improves post-deal, albeit the company still ranks in the bottom
quartile of our global multi-industry framework; see our report Preparing
for the next industrial revolution, April 28, 2014. The main reason for this
higher ranking is Rail’s higher long-term growth prospects than Power
Generation (we expect 0.8% long-term growth for Alstom post-deal vs. -0.5%
for Alstom pre-deal). We assume Alstom’s returns post-deal will still be
bottom quartile in the context of the capital goods sector.
Our new EV/EBIT-based (9x CY15/16E) 12-month target price of €28.5 implies
only 2% upside for Alstom shares; hence our downgrade to Neutral. Key
upside risks to our Neutral rating are: a material improvement of the
global rail outlook, higher-than-expected synergies between Alstom
Transport and GE Signaling, better-than-expected GE Signaling
profitability (assumed high single digit), and better-than-expected FCF
generation of the standalone entity. Downside risks include failure of the
completion of the deal as subject to outstanding contingencies, further
litigation charges and weaker earnings.