Siemens Could Struggle to Turn Alstom
Siemens SIE.XE +0.40% is still powering up for a move on Alstom. ALO.FR -0.03% With just more than a week until the German conglomerate's deadline for deciding whether to counter General Electric's GE -0.60% offer for Alstom's energy business, putting out a proposal that will win over Alstom's board looks challenging.
GE set the bar high with its $17 billion offer at the end of April. The GE bid values Alstom's power business at 7.9 times earnings before interest, taxes, depreciation and amortization, a hefty premium to Alstom's group valuation.
GE's all-cash proposal should appeal to Alstom. The French company has struggled with its debt for more than a decade. Selling its energy business to GE would leave Alstom with €7.27 billion ($9.9 billion) in net cash based on UBS UBSN.VX -0.28% estimates. That is equivalent to 80% of its market capitalization. Alstom has said it would return some to shareholders. But it could also look at purchases to bolster the remaining transport business.
In contrast, the deal that makes most sense for Siemens is one that minimizes its cash outlay and includes the disposal of its rail business to Alstom. For Siemens, that would remove a business that is a drag on group profit margins while simplifying the group to one focused on energy and automation.
Siemens's preliminary analysis put an enterprise value on Alstom's energy assets of €10.5 billion to €11 billion, according to an April letter to the Alstom board. Siemens's rail assets, including its valuable signaling business, are worth €3.3 billion, estimates UBS. That suggests a Siemens offer might not include much more than €7 billion in cash.
Furthermore, while GE and Alstom's power businesses have virtually no overlap, a Siemens deal could raise antitrust concerns in both power and rail. To soothe political headaches, GE has also committed to adding a net 1,000 new jobs in France over the next three years. But both Siemens and Alstom could need to cut jobs to deliver cost savings.
So a report this week suggesting the French and German governments could take stakes in the new Alstom via a Siemens deal is hardly comforting. That may not factor into Siemens's plans. But it adds to the impression of a Franco-German tie-up risking the creation of another underperforming European champion.
Siemens's pursuit of Alstom has barely started. But it already looks to be running low on steam.