Depending on who you want to believe, it seems the dance between General Electric (NYSE:GE) and struggling French company Alstom (OTCPK:ALSMY) may continue even after the music stops. And even though German rival Siemens (SI) has tried to cut in with its own dance moves, General Electric CEO, Jeff Immelt has no intention of leaving the party alone. But what happens after they leave is the question everyone is worried about.
As it stands, there have been a series of maneuvers to keep General Electric from closing this deal, which Alstom's board recently accepted after GE was "asked" to sweeten its offer. Although rival Siemens has expressed interest, but the way I see it, this was merely a futile attempt to get in GE's way. Call it; "all is fair in love and capitalism."
At the end of the day, the French government got GE to pony up more cash, while at the same time receiving assurances that GE wouldn't eliminate French jobs. But apparently, that's still not enough, and there's been another snag. This time, it prompted Alstom management on Wednesday to plea for closure. While citing (among other things) a decline in orders and profits, Alstom management is now begging that this deal be finalized for their own survival.
Note, Alstom was not in the best of shape, to begin with. French billionaire Martin Bouygues, who owns a 29% stake in the company, was forced to absorb a $1.9 billion write-down on Alstom due to a 37% drop in its shares over the past year. Plus, due to the economic slowdown in Europe, Alstom, which specializes in high-speed TGV trains, had already lowered its profit guidance, which led to debt-rating downgrade by Moody's.
So on Wednesday, I don't believe anyone was surprised by Alstom announcing that it was canceling its dividend due to its weakening fundamentals. Management reported a 10% drop in orders and nearly a 30% drop in profits, while revealing a higher-than-expected cash burn rate for the period ending in March.
While leaving the door open for Siemens to reenter the conversation, Patrick Kron, Alstom CEO, advises that any further blockage of GE could hurt Alstom's business. Further, Kron added that Alstom would not remain in a transport-focused business. Recall, the transportation business is what GE has been after, which fits in line with Immelt's inorganic growth strategies. Not to mention, Alstom will bring immediate accretive benefits to shareholders.
As it stands, Kron is warning anyone who opposes this deal that one way or another, Alstom will exit transports. While supporting the French government's need to intervene on this issue, he urged for the process to move quickly by adding:
"My goal is to ensure the process is serene, rigorous and transparent, but also that it doesn't drag on for too long because in the end it would take a toll on the company and its employees."
It remains to be seen to what Kron's comments spur more discussions. But given that the French government owns a stake in Alstom, they want to ensure that they are able to "appropriately" profit on their investments. And if they believe in using Siemens as a ploy to continue milking GE, this dance may continue for a few more weeks. But Kron's comments, which revealed the dire state of Alstom, have just removed some of that leverage.
I've said this before, however, it's a matter of when, not "if" this deal gets done. Immelt is not dumb, and Alstom (perhaps unknowingly) just opened the door for the kill. In the meantime, GE investors have to trust that GE management will get this deal done and grow the company's cash. As it stands, this stock remains one of the most underrated names on the market, and has in Immelt, one of the best CEOs in any industry.
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