- GE continues to make acquisitions in order to boost its industrial business.
- Potential Alstom deal is not easy, French politics and Siemens are on the lure.
- GE's valuation is largely fair, yet the dividend is appealing.
Investors in General Electric (NYSE:GE) reacted unnerved to the company's ambitions to acquire the power and grid business of Alstom in France.
A potential $13.5 billion deal would mark the largest acquisition ever by General Electric, which has made several billion dollar acquisitions in recent years in order to boost its industrial activities.
I believe it could be a nice deal for GE, given that it can close the deal at similar terms rather quickly. While the valuation is largely fair at the moment, I am attracted to GE's fat dividend checks.
Battle For Alstom
As is widely known at the moment, General Electric made a $13.5 billion offer for French-based Alstom's energy business. The offer for the troubled business has been endorsed by the board of the French company.
In a presentation held on the 30th of April, Jeff Immelt outlined the rationale for the business, based on a strong strategic rationale and huge opportunities for cost savings. Immelt furthermore stressed the potential for growth, which should result in more employment in the future at Alstom's divisions.
As a matter of fact, Immelt even went to Paris to reassure the French president Hollande to secure employment of the French jobs, a hyper-sensitive issue in France amidst high current unemployment levels.
To clarify, GE aims to buy the thermal power, renewables and electrics grid division, thereby not including the transportation business. In total, the energy business of Alstom employs 65,000 people, generating revenues of $20.4 billion, which is roughly 70% of total revenues.
Are The Germans Coming To The Rescue?
On the back of the proposed deal, German-based Siemens (SI) woke up and is considering its options.
One of the key considerations would be to acquire the energy business of Alstom, which appears to be too small to operate as a standalone business. In exchange, the Germans could swap their transportation business to Alstom, making it the leader in rail transport, being the producer of the famous TGV.
A deal with its German neighbor could theoretically result in more layoffs, as the companies would have more combined redundant operations. This is even as Siemens said a potential deal would not result in layoffs.
Yet GE Is Leading The Process
Of course, the whole process started with General Electric making an offer for the energy business of the French company. The company had some quick successes, including board approval, as well as that from Martin Bouygues, Alstom's controlling shareholder.
The fact that GE has been operating a long time in France already and has a fairly good reputation has been helpful as well. Despite these positive signs, political resistance against the deal appears to be on the increase.
Biggest Deal Ever
If a deal were to succeed, the acquisition would be the largest deal ever made by General Electric.
The $16.9 billion deal, or $13.5 billion net of cash, includes the purchase of the thermal, renewables and grid activities. Combined, these businesses generate revenues of $20 billion and EBIT of $1.3 billion.
This values the company at 7.9 times pro-forma EBITDA, yet General Electric foresees this multiple to drop to just 4.6 times EBITDA once factoring in expected synergies. Annual synergies are projected at $300 million in year 1, expected to increase to $1.2 billion by year 5. Given that GE expects the deal to close in 2015, full synergies are expected to be realized in 2020.
As such, the deal would be accretive to the tune of two to four cents per share in year 1, with further accretion seen thereafter on the back of strategic and cost synergies.
Takeaway For Investors
A potential deal could have a meaningful impact on the company's results. GE reported $146 billion in revenues over the past year, on which it earned $14 billion. Earnings were aided by a very low effective tax rate.
A potential deal could boost revenues towards $165 billion, as earnings could improve by a billion in year 1, before factoring in additional interest payments, increasing towards $2 billion per annum in five years' time.
At $26.50 per share, the company's stock commences a roughly $265 billion valuation, as its industrial net debt position is very limited. Of course, the company would incur a bit of leverage following a potential deal, but this would not be too worrisome.
Even when guiding for earnings of $15 billion, the valuation would come down to 17-18 times earnings, yet the very low tax rate is a concern with increased scrutiny about US corporate tax rates.
I believe that the current valuation is largely fair as investors continue to applaud the focus away from the financial business towards the industrial side of the businesses. I have no compelling reasons to chase up shares at current levels, although a quarterly dividend of $0.22 per share, which represents a 3.3% dividend yield, is quite appealing.