Much has been said and written about General Electric's (NYSE:GE) attempt to acquire France based Alstom (OTCPK:ALSMY). The company has had to face numerous hurdles, including French economic nationalism, a rival offer from Germany's Siemens AG (OTCPK:SIEGY), and the general anxiety of its shareholders. However, I think General Electric may be close to sealing the deal.
An overview of the rivaling bids
A few weeks ago, General Electric offered to pay $17 billion, or $13.5 billion net of cash, for Alstom's energy related assets. At this price point, Alstom will be immediately accretive to General Electric's earnings given the relative undervaluation of the French company.
General Electric desires Alstom mostly due to its turbines business. This is an area where General Electric has a relatively small footprint, especially in Europe. In addition, Alstom has several major servicing contracts with European power plans, a business which is highly profitable and low-risk.
Under the General Electric proposal, Alstom would become a pure-play transportation play, with assets in high speed TGV bullet trains, light rail, and signaling equipment. In addition, the company would be in much better shape from the infusion of cash.
Furthermore, General Electric has made a number of concessions to win French government approval, including promising to create 1,000 new jobs in France as well as forming an alliance with the French government regarding nuclear power and other strategic interests.
As for Siemens, its proposal is all over the place. According to Bloomberg, Alstom's is not pleased with the offer as it is far too complex and prefers General Electric's simpler proposal.
For starters, due to its limited financial firepower, Siemens has had to partner with Mitsubishi (OTCPK:MHVYF).
Specifically, Siemens has offered $3.90 billion euros ($5.3 billion) for all of Alstom's gas turbine business and related contracts. Furthermore, it has offered a three-year job guarantee and promised to create 1,000 jobs in France, eerily similar to the General Electric promise. Furthermore, Siemens may also merge its rail assets with Alstom's, though the details for this transaction were not disclosed.
Mitsubishi would pay $3.10 billion euro ($4.20 billion) for the various Alstom assets listed below:
- 40% of the nuclear and steam turbine business
- 20% of the hydropower business
- 20% of the electric grid business
In addition, Mitsubishi has offered to buy up to a 10% equity stake in Alstom from French conglomerate Bouygues SA (OTC:BOUYF). However, Bouygues has stated that it is not interested in selling any of its equity.
This offer would keep the vast majority of Alstom in French control, assuaging fears over strategic assets such as nuclear power plants. In addition, the offer would value Alstom $1.0 billion euros more than General Electric, though the methodology has been questioned by analysts.
In total, the Siemens/Mitsubishi offer consists of $7.0 billion euros ($9.5 billion) in cash, less than the $13.5 billion offered by General Electric.
GE to make a new offer for Alstom
"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
Reuters is reporting that General Electric plans to unveil an improved offer for the energy arm of Alstom to the French government on Thursday. While there are many conflicting reports, it appears as if General Electric may consider:
- Selling its train-signaling business and or forming a train related joint venture with Alstom
- Refine job guarantees, planned investments and access to nuclear technology
- Create an independent audit committee to ensure its pledge to create 1,000 French jobs
Basically, it appears as if General Electric has Alstom's management onboard to accept its proposal. However, the real opposition is coming from the French Socialist government.
"GE is seeing the government and the Alstom unions tomorrow," the source close to GE said on Wednesday. "The offer will, of course, be improved."
A separate source close to the matter confirmed the meeting and added that Economy Minister Arnaud Montebourg was set to meet GE management around midday on Thursday, before meeting with Alstom unions in the afternoon.
The French government, though officially neutral to both deals, clearly wants to keep Alstom in French or European hands. French economy minister Arnaud Montebourg, backed by new legislation, has the power impose conditions and veto any proposed deal with Alstom.
While I personally think the current offer plus previous concessions is good enough, it appears General Electric is buckling from pressure put on it from the Siemens counter-offer. Indeed, reports indicate that French President Francois Hollande told both sides to come up with better offers almost immediately after the Siemens' proposal was made public.
None of this should come as much surprise. As I noted in a recent article, the company clearly needed to boost its own offer in response to Siemens' proposal.
Alstom has until Monday, June 23, to accept or reject General Electric's formal offer. Hopefully, General Electric does not need to increase its offer price and can get away with the above outlined concessions. However, given the highly political nature of the Alstom debate, nothing is for certain.
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.
Disclosure: The author is long GE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.