General Electric (NYSE:GE) is really in a bind. Its $13 billion bid for Alstom SA (OTCPK:ALSMY), a French maker of power plant equipment and high-speed trains, has come under severe scrutiny. First, the French government raised concerns, citing possible job cuts if a deal were to happen. Furthermore, there are some strong nationalist and protectionist undertones. However, further complicating matters are reports that German juggernaut Siemens AG (SI) has proposed a counter-offer that would keep Alstom firmly in Europe.
The French problem escalates
"GE and Alstom have their agenda, which is that of shareholders, but the French government has its own, which is that of economic sovereignty,"
French economy minister Arnaud Montebourg
According to reports, Alstom CEO Patrick Kron had just landed from a flight to Paris from the US, where he was close to completing a sale of the energy operations to General Electric, when he received an urgent message, namely that French economy minister Arnaud Montebourg wanted to know why the company was negotiating without his knowledge.
In 2005, France's government passed an anti-takeover decree, where it can intervene to protect companies from being acquired if it deems them to be of national or strategic importance. This applies even if the government has no ownership stake.
Mr. Montebourg has referred to Alstom as a "symbol of French industrial strength and know-how." Furthermore, he is not afraid to nix nearly completed transactions. Yahoo Inc.'s (NASDAQ:YHOO) attempt to buy Dailymotion from France Telecom SA unraveled after the French government vetoed it, even when both companies were more than willing to go through with the merger.
General Electric and Alstom were extremely close on sealing a deal, with some speculating that an official announcement could have come as soon as Sunday.
However, the French minister has basically slammed on the brakes on any deal. According to the WSJ, in a letter to Mr. Immelt, Mr. Montebourg postponed the meeting and warned Mr. Immelt that the French government had the power to "impose conditions" on the proposed deal with Alstom and, if necessary, to "deny it."
Alstom's future has become front page news in France, with a banner headline on Le Journal du Dimanche reading: "A national psycho-drama." However, Alstom said on Sunday that it was reflecting on its strategy and would make an announcement by Wednesday.
A look at Siemens proposal
However, according to Reuters, Siemens sent Alstom's board of directors a letter to "signal its willingness to discuss future strategic opportunities." While not confirmed, it appears that the French government may have approached Siemens about a possible alternative deal after learning about the General Electric offer.
In regards to Alstom's high-speed trains, it appears as if neither company was focusing on this asset. However, the German company is prepared to merge Alstom's train segment into its own rail-systems business, while General Electric was looking to spin-off that segment.
Instead, both companies are eyeing Alstom's turbine business, which has wide acceptance in Europe and has seen growth and market share gains in emerging markets.
Siemens' deal is slightly more lucrative than General Electric's, with the firm offering $14 to $15 billion in cash and assets compared to $13 billion from GE. In addition, Siemens has said that it would guarantee jobs in France for at least three years and leave some decision-making centers, mostly involving jobs, in France.
Why General Electric wants to buy Alstom
While it may not seem obvious to the outside observer, Alstom is already a highly profitable company, with strong cash flows and growing orders. Indeed, based on standard valuation metrics, Alstom is much cheaper than either General Electric or Siemens.
Furthermore, the premium applied (25%) for Alstom is hardly expensive, with that stock down nearly 20% Y/Y before news of a possible acquisition broke. In addition, buying Alstom would allow General Electric to deploy its overseas cash reserves instead of returning them to the US and having to pay taxes on them.
As noted above, Alstom is a leader in turbines, especially those for dams. In addition, the company's other energy assets, such as grids and power plant equipment, are widely used in Europe.
Finally, with the continent slowly recovering from its own long recession, Europe's energy infrastructure is due for an upgrade cycle, especially given that many large capital projects were delayed in prior years. For these reasons, Alstom appears to be a good match, at a good price.
The French government clearly wants to keep Alstom in French hands and both companies know it. However, General Electric needs to tread carefully. French economic nationalism, or Dirigisme, is a strong force in France, especially on the left.
In addition, General Electric may need to sweeten its offer for Alstom. Not only is Siemens' current offer better in terms of valuation ($14B vs. $13B), but it is also better in terms of the amount of concessions made to the French government.
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