Alstom/GE: Updating our ‘no-deal’ scenario; remain Neutral
* What's changed
Reuters reported on June 11 that the EU might pose objections to the
acquisition of Alstom’s Power assets by GE. The basis of objection
according to the report is concerns that the European gas turbine market
would be reduced to two players (Siemens and GE). The report also stated
that if the EU issues a ‘statement of objection’, GE would need to make
concessions. At the EPG conference in May, GE’s CEO noted he would
consider remedies involving ‘selling intellectual property for a product’,
but nothing that would impact service revenue streams.
* Implications
In our note GE vs. Siemens/MHI offers – Take II, published June 20, 2014,
we showed various scenarios for Alstom value including a ‘no-deal’ case
where Alstom continues to own all its discontinued Power assets. We
update this case and now see a value of €17/sh (down from €23/sh), which
decreases in three areas: (1) pension liabilities are up 40% on FX/interest
rates (€2/sh); (2) Alstom was fined $772 mn by the US DoJ (€2/sh); (3) 12-
month forward EBIT estimates (down 4.5% on a comparable basis; €2/sh).
From Alstom’s point, should a ‘statement of objection’ be issued the
outcome is binary (deal/no-deal). If GE agrees to remedy, the value of the
deal for Alstom is not impacted and GE alone would have to make
concessions to the EU (i.e., structure and deal price would remain intact).
* Valuation
We still assume the deal completes. Our 12m TP of €29.7 is based on 8.5x
2016/17E EV/EBIT for the Transport assets that would remain with Alstom
(including GE Signaling earnings to be acquired) and incorporates cash for
the Power sale, in line with the agreed offer. 8.5x is in line with LT growth
(c. 0%) and returns (Q4) prospects, within our sector-relative framework.
* Key risks
Key downside risks are ‘no-deal’, EM competition, weaker cash flows;
operational risk. Upside: better order intake, higher cash generation, M&A.