General Electric (NYSE:GE) really needs to be careful. The company has offered $17 billion to acquire the energy assets from Alstom (OTCPK:ALSMY), a French maker of power plant equipment and high-speed trains. However, French economic nationalism, or Dirigisme, stands in the way and has thrown a wrench into the works. In addition, German Siemens AG (OTCPK:SIEGY) has proposed a strong counter-offer which would combine the two European companies into a rail and energy juggernaut.
A look at General Electric's proposal for Alstom
Late in April, General Electric began talks about a possible purchase of the energy assets from Alstom, which represent about three-quarters of the French company's sales. Alstom is a global leader in hydro turbines, smart grids, and other power plant equipment. These assets are a good fit for General Electric, as they complement its energy portfolio. In addition, they are expected to be immediately accretive to EBIT, due to the French company's relative undervaluation.
However, the French government has been critical of any deal. According to various reports, the French economy minister, Arnaud Montebourg, noted that he has the power to "impose conditions" on the any proposed deal with Alstom and, if necessary, to "deny it."
The current price tag of $17 billion is well above the original offer of $13 billion reported by Bloomberg. This increase is one of several concessions made by the company in order to get French government approval. General Electric has already agreed to extend its bid for Alstom until June 23 from June 2.
Besides the increased price, General Electric has also promised to preserve French jobs, create up to 1,000 new jobs in France, and maintain French access to key nuclear power technologies.
Siemens' competing offer is a serious one
As for Siemens, it is pursuing an entirely different course in its bid for Alstom. Basically, instead of buying Alstom's power assets wholesale, Siemens intends to swap its rail assets in exchange for Alstom's power assets.
The resulting company would be a combination and joint venture of Siemens' and Alstom's rail assets. However, there are conflicting reports which indicate that Siemens would still like to keep at least some parts of its rail business.
Do note that details surrounding the Siemens bid are murky. In addition, Alstom has expressed concerns regarding sharing its trade secrets and opening its books to its two major rivals. Siemens is expected to make a formal bid by June 16, according to Reuters.
Conclusion: General Electric is still a strong buy, even without Alstom
While the turmoil surrounding Alstom is slightly off-putting, General Electric still is a stock worth owning.
At about a 15x forward PE multiple, the stock is cheap compared to its industrial peers, especially considering that the company has several segments posting double-digit growth rates.
In addition, its 3.25% yield is well above the market average. General Electric has committed itself to returning large sums of capital (share buybacks, dividend increases) to its shareholders through 2018, mostly funded via internal cash flow and the divestiture of GE Capital.
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Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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