Siemens Should Resist Entering Alstom Fray
Siemens SIE.XE -2.48% is fanning flames in France.
The German giant is considering barging in on General Electric's GE -0.02% offer for Alstom's ALO.FR +10.93% energy businesses in a deal which could be worth up to €11 billion ($15.2 billion). That isn't exactly what investors had bargained for with Siemens Chief Executive Joe Kaeser. The hope was that he would outline plans to shrink the conglomerate when he presents his strategy next week.
Buying Alstom's energy businesses has some merits. It would keep GE from entrenching itself more deeply in Europe, where Siemens gets roughly half its sales. Siemens also would absorb a major competitor in power generation, doubling its share of global installed capacity to about 50%, estimates Citigroup. C -1.28% And it would take out a big rival in power transmission, leapfrogging ABB to become the largest provider of high-voltage products world-wide.
Another perk of a deal involves Siemens's proposal to swap its high-speed-trains and locomotive operations as part payment for Alstom's energy assets. That would give Siemens a welcome exit for businesses that are a drag on profits and where competition from Asian vendors shows no signs of easing.
The price tag might even look like good value. Assuming a price tag of €10 billion, Alstom's energy assets would be valued at about 8.6 times 2015 earnings before interest, taxes and amortization based on Citigroup estimates. Siemens trades at 12.6 times.
Similar to GE, though, Siemens shareholders can't ignore the hefty risks involved in pulling off this sort of deal in France.
Siemens has already promised Alstom to have no layoffs in France for three years, limiting potential cost savings. And Alstom already makes profit margins in power generation that are one-third lower than Siemens's. A deal also would mean taking on Alstom's €26 billion order backlog—and executing on its own orders has been one of Siemens' major failings, contributing to more than €20 billion in charges since 2007.
Moreover, a deal could stumble into antitrust considerations, which are greater for Siemens than for GE. For example, in turnkey solutions for gas and steam power plants, Siemens and Alstom would have a combined market share of up to 70%, according to a European Commission decision on another case cited by Exane BNP Paribas. GE's share is at most 10%.
Tempting as Alstom is, it would add more complexity at a time when Siemens investors had hoped for a simpler life.