Alstom/GE/Siemens - Up To New Ventures

Includes: ALSMY, GE, SIEGY
by: Catharina Hillenbrand-Saponar


GE will most likely take over Alstom. It will win stable and lucrative future service revenues. But it buys a weak core business and a complicated political situation.

The deal will be seen positive for GE, as it adds to its transformation.

Any negative reaction on Siemens should be used as an entry point.

GE's offer will most likely be successful. GE has won service revenue market share in turbines, and a change of future gas market share improvement of c. 100bps. It also has acquired an intense political situation, a weak core business and management challenges for profitability. But, the deal could still be seen as a final step in its ongoing transformation drive. A positive reaction is likely. An initial negative reaction is likely on Siemens (OTCPK:SIEGY), but that should be used as an entry point. The company will continue its refocusing strategy, and is very well placed to capture future growth, including in gas turbines, without Alstom (OTCPK:ALSMY). On a side note, both names are market proxies, and they entail some short-term risk of correction under that consideration.

The Alstom board has decided in favour of GE's offer for Alstom. Given the improvements to GE's offer, that corresponds to the government's desires in most aspects. The government is now looking for a 20 percent stake in Alstom. That is presumably to safeguard its national interest and its influence. Should GE not accept that, the government will block the bid.

There are still some uncertainties on the price: The government is reported to offer Eur 28 per Alstom share, whereas Bouygues is looking for Eur 35. Alstom shareholders should expect, thus, at least a 20-25% premium over Friday's closing price.

I expect the offer will now go through in this form.

GE will acquire about 4% of the global turbine market share, which will make it twice the size of Siemens. One of the very attractive elements are the service contracts that come with the installed base of Alstom turbines. Is Siemens to worry? As far as installed base is concerned, it will miss out on future stable cash flows from service revenues. But at the likely multiple, it can substitute those cash flows with other acquisitions. For new growth, everything is open.

GE will also acquire businesses that suffer from weak end-market outlooks, particularly European utilities, that still look nowhere near a bottom. It will have to find ways to improve profitability, but within the tight constraints it faces from its commitments to the French government. Besides that, it finds itself in a very political context that it will have to manage. But it will acquire market share and a further step ahead in its transformation process.

As far as Siemens's share price is concerned, expect an initial negative reaction. But the company has an intrinsic refocusing process, and should emerge with a better starting position for new growth from there. With regards to the gas turbine business, Siemens loses out on acquiring a 150bps market share improvement. But again, it is the future that will determine market share battles on growth, and the key consideration on gas turbines is future growth.

Any negative reaction on Siemens should be an opportunity for entry.

On a side note, both names, GE and Siemens, are market proxies, and if there is concern over broader market corrections, both will get hit.

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