General Electric: Profits In Rear View Mirror Will Be Larger Than They Appear

| About: General Electric (GE)

Summary

GE is the ostensible winner in the contest for Alstom.

The French government has given its blessing to GE’s offer while buying a 20% stake for itself.

This means GE is now effectively going into business with the French state.

In the following article I will detail the terms of the offer and give my opinion regarding the proposal.

Overview

General Electric (NYSE:GE) is the seeming winner in the contest for Alstom (OTCPK:ALSMY). The French government has given its blessing to GE's offer while buying a 20% stake for itself. The Economic Minister of France, Arnaud Montebourg, stated Friday:

"The deal still needed some work and added the government would buy a 20 percent stake in the hotly-contested company. Montebourg said he used a newly-created state decree to reject both of the existing offers as not being in France's strategic interest, and had formulated fresh demands for GE."

In the following sections I will detail the terms of the offer and give my two cents on the matter.

Offer terms

According to the latest offer terms, GE is now effectively going into business with the French government. Montebourg stated:

"France had demanded strict conditions guaranteeing energy independence, job creation on national territory, and maintenance of decision-making centres in France."

GE has effectively beaten out Siemens (OTCPK:SIEGY) and Mitsubishi (OTCPK:MHVYF) for the assets of Alstom, but at what cost is the question.

According to breaking news from Reuters out Saturday afternoon, the French government has given its blessing to GE's offer. The major deal points are as follows:

  • The offer is for approximately $13.5 billion in cash.
  • GE would acquire Alstom's natural gas turbine operations along with its valuable customer base.
  • GE will sell to Alstom its railroad signaling business
  • A 50-50 joint venture would be created for steam turbines, renewable energy and electrical grid systems.
  • Montebourg stated further discussions on the shape of joint ventures in other energy areas ranging from renewables to nuclear are a prerequisite to a final deal.
  • France would become a top shareholder in Alstom by purchasing a 20% stake in Alstom from Bouygues (BOUY.PA), which currently holds a 29% of the company. The price of the 20% stake have not been agreed upon as of yet.
  • GE's binding offer expires Monday.

The potential effects of the new terms

This deal in no way resembles the initial offer GE made for Alstom's assets. Under the new terms the French government basically becomes GE's junior partner. This will complicate the decision making process greatly. Further, the deal has been substantially watered down for GE. Fewer cost savings will lead to less profit. Immelt defended the deal terms stating:

"86% of the deal's synergies, essentially the value of the energy business, are outside of the joint ventures."

The final deal is not the 100% buyout of Alstom's energy business GE proposed in its original bid. This is the bad news. The good news is after all is said done, the entirety of the concessions amount to very little as Immelt points out. Many will now say GE has signed up for indentured servitude to France. On the other hand, many do not realize GE already has 10,000 French employees as it stands today. As top GE analyst Russell Solomon of Moody's points out:

"GE employs some 10,000 people in France and is already very familiar with the business environment there. They know what needs to be done to get the regulator comfortable."

I agree. I did a tour of duty in France at one point in my career. The French people are good people you just have to have the correct approach. I was able to complete my project on time and under budget with the use of French resources. I submit GE is well versed in dealing with the French and may have more leverage than some may perceive at this point.

Furthermore, the deal effectively improves GE's dominance in the gas turbine business. This is big. GE will now be able to provide turbines for power stations and technology for electricity grids throughout Europe and everywhere else Alstom is in business.

Alstom's Global Footprint

Click to enlarge

(Source: Alstom.com)

The Bottom Line

General Electric may have just pulled off the oldest negotiating trick in the book, a low ball first offer. I surmise the entire hullabaloo over the Alstom deal and concessions has been way overblown. By doing this deal General Electric will significantly expedite its goal of transitioning from a financial to an energy company. This may boost the share price simply based on expansion of the multiple, not to mention increased EPS if the deal is accretive in its final form. I like those odds. General Electric is a buy here. Lock in the dividend yield at 3% and forget about it for a few years. You will do fine and won't even remember what all the fuss was about.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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