* Update According to a Bloomberg article 24 April, GE is in talks to buy Alstom for a price
of $13bn, i.e. c.€30 per share. Alstom’s transportation division could however be excluded
from any potential deal according to Le Figaro. Alstom issued a press release saying that
while it is not aware of any potential public offer for Alstom shares, the company constantly
reviews the strategic options for its business. Assuming an offer price of €30 per share for
the whole group, this would value the company at a 15x P/E and an 11x EV/EBIT based on
our FY 2014/2015 estimates. Excluding Transportation (which we value at €6.5/share),
implied multiples would be around 20% higher.
* SG view We believe that such a deal would make strategic sense for all parties involved.
Bouygues would probably be a happy seller of its 29% stake, as it has considered Alstom as
non-core for a few years (valued at €33.7/share in its own books), while Alstom could see the
transaction with GE as a decisive solution to solve its financial issues. For GE, we believe the
fit looks very good: 1) It offers the opportunity to create an undisputed leader in the thermal
service and retrofit market (Alstom has supplied equipment present in 25% of the global
power installed base). 2) GE already tried to take over the Transmission business in 2010 in
order to rejuvenate its own subscale grid automation business. 3) Alstom Transport business
would enable GE to achieve its objective of shifting from a US rail business to a global
transportation equipment and solution provider. We see no major hurdles to the transaction.
We estimate French political opposition should remain limited given the combined entity
could better protect jobs in France than Alstom standalone. We also believe a counterbid
from Siemens is unlikely given the prospects of antitrust issues in Europe.
* How we value the stock We believe the probability of the deal being finalised is high and
apply a 60% weighting to such a scenario. As a result, we raise our target price to €28,
which is the mix of a takeover price of €30 and our standalone valuation (€25, derived from
the combination of a SOP and a DCF assuming a long-term margin of 6.5%).
* Events, catalysts & risks FY13/14 results on 7 May. Downside risks: greater pressure on
prices, slower-than-expected divestment programme.