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Summary

  • General Electric may need to improve its $17 billion offer for Alstom.
  • Rival Siemens may team up with Mitsubishi and or Hitachi with a competing offer.
  • General Electric has already made numerous concessions to the French regarding jobs and nuclear power technology.

When General Electric (NYSE:GE) made its initial bid for France based Alstom (OTCPK:ALSMY), I am not sure it expected to face as much trouble as it has. According to reports, the companies were extremely close to sealing the deal, with CEO Jeff Immelt already on his way to Paris to put the finishing touches. This was likely to be a large part of Mr. Immelt's legacy, with the transaction representing General Electric's biggest acquisition in its history.

However, German conglomerate Siemens AG (OTCPK:SIEGY) has turned out to be the fly in the ointment. Not only has that company put out a competing offer, but it has also compelled General Electric to make a number of concessions in order to sweeten its deal.

Siemens is in talks for a joint bid

While there are many conflicting reports, it appears as if Siemens is seeking a partner for its Alstom bid. According to Reuters:

Siemens and Mitsubishi are putting the finishing touches on an offer for Alstom's turbine businesses, including a cash element of roughly 9 billion euros ($12.3 billion), according to sources close to the bidders.

Siemens would form a gas-turbine joint-venture with Alstom meanwhile, and Mitsubishi would create ventures with the other energy units.

In addition, it appears as if Hitachi Ltd (OTCPK:HTHIY) may also be looking to join Siemens and Mitsubishi (OTCPK:MHVYF) for Alstom. Hitachi and Mitsubishi have a history of working together, with the companies merging their thermal power businesses at the beginning of the year.

A three-party bid would give the group enough financial muscle to counter General Electric. Do note that a formal offer (if any) from Siemens and Mitsubishi is expected to be disclosed on Monday, June 16.

General Electric is going solo

While I admire the tenacity, General Electric seems to be a tad bit arrogant when it insists that it does not need a partner in its bid for Alstom. Unlike Siemens, the company thinks that its offer is good enough as is.

General Electric is aiming to acquire Alstom's energy related assets, which represent about three-quarters of the French company's sales. The price tag of $17 billion ($12.40 billion euros) may seem a tad high. However, when subtracting net cash of $4.0 billion, Alstom will still be accretive on an EBIT basis for General Electric. In addition, the company has promised to create 1,000 new jobs in France as well as form an alliance with the French government regarding nuclear power and other strategic interests.

By far the most lucrative asset in Alstom's portfolio is its turbines business, which are used throughout Western Europe, especially in nuclear power plants and wind farms. In addition, Alstom is a key maker of transmission lines and smart power grids. In essence, this transaction will give General Electric an increased presence in key markets where it currently has a relatively small footprint.

Do note that via this deal, Alstom will keep its high-speed TGV trains segment. While I suspect that General Electric may have wanted these assets, these trains are often seen as a symbol of France itself and it would be quite the political scandal to sell them to an American company.

General Electric may need to improve its offer

"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

However, the current deal may not be good enough. According to numerous reports, French Finance Minister Michel Sapin has said that he expects General Electric to improve upon its $17 billion offer.

"Mitsubishi forming an alliance with Siemens improves Siemens' offer," Sapin noted via an interview broadcast on Europe 1 radio and news channel iTele. "I think that GE is also going to improve its offer."

Besides the cash offer I noted earlier, there are also reports that Siemens could swap its train-making business for Alstom's energy assets, essentially creating two large European companies in rail and energy.

Do note that it appears as if the French government may prefer the Siemens' bid. French Economy Minister Arnaud Montebourg has made plenty of waves, noting that the General Electric bid was unacceptable.

This opposition was a large part of the reason why General Electric has made the concessions it already has. The French government has the ability to block foreign companies takeover of "strategic" assets, requiring them to first obtain the economy minister's approval.

Conclusion

With an equally compelling offer coming from Siemens, the current bid from General Electric may not be enough. I strongly suspect the company to up its offer slightly in response to the official offer from Siemens.

However, I still think General Electric is making the correct move in going for Alstom. Not only will this allow it to deploy some of its $57 billion in overseas cash, but it will also move the company more towards its long-term goal of becoming more industrial focused.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

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Source: General Electric: Alstom Is Slipping Away