General Electric (NYSE:GE) finally got its bid approved for its long-awaited acquisition of Alstom (OTCPK:ALSMY). The original deal offered by GE was to acquire its power and grid business units for roughly $17 billion. The deal faced considerable opposition from the French government as they wanted to create a join company with Siemens (OTC: OTCPK:SIEGY). As a result, GE had to extend the deadline for their offer. However, the Alstom CEO, Patrick Kern was able to resist the pressure from the government and push through a deal with GE. This article in the Wall Street Journal details the politics and the drama behind the deal. We will focus on the impact of the Alstom deal on GE's business and how it will allow the company to have a wider footprint in Europe.
Growth in Power Business
Although General Electric had to make some amendments in the original deal, still it got exactly what it wanted in the first place. With this deal, GE is set to scale up its power business, primarily gas and steam turbines which have shown strong growth in the past and will continue to do so. The reason behind the growth of both gas and steam turbines is that they are a part of the same cycle in electricity generation. First, the waste heat is converted into steam by gas turbines, or better known as waste heat recovery systems. Then this steam is used by steam turbines to generate electricity.
We have seen substantial growth in this sector in the recent past and more players are inclined to use this equipment to increase the efficiency. The efficiency in the process provides considerable cost reduction in power generation. Moreover, coal-fired power generation is getting phased out very fast due to strict regulation from the U.S. government and age-related deterioration. In 1998, gas turbines accounted for only 15% of the total electricity generation of the U.S. A research by Forecast International suggests that gas turbines will make up over 40% of the total U.S. electricity generation by 2020. In order to keep up with the growing demand of the U.S., the annual growth rate would exceed 3%.
One more thing to consider here is that U.S market is one of the most developed markets. GE already has the lion's share in this market. In addition to it, we believe that most of the growth in the power sector will be derived from the developing nations. GE has a wide global presence in the power business. With the Alstom deal, GE would be in a much better position to expand its business in the developing economies as well as Europe.
General Electric's Market Share in the Segment
GE already has a huge global market share in the gas turbine business. A forecast covering the timeframe of 2013 to 2021 suggests that GE's global market share would exceed 24% over the next 6 to 7 years. However, as the research was done last year, it does not incorporate the acquisition of Alstom business. With the cost synergy which GE will have following this deal, the company will certainly get a better market share and might reach up to the level of Solar, which accounts for 32% of the global gas turbines market.
According to GE, global power generation capacity will increase by 3,400 GW over the next decade. Out of this, 1,600 GW of power generation capacity will be comprised of gas and steam turbines. GE's LM2500PH offers 27.76 Megawatts of capacity and its LM2500PE offers 22.34 Megawatts. On average if we take a figure of 25 Megawatts, we are talking about 64,000 average units sold over the next decade. Considering a 25% average market share which GE might increase further in the future following Alstom acquisition, 16,000 gas turbines worth of market awaits GE over the next decade.
GE already had a strong position in the power business. As it creates cost synergies with Alstom's assets, it will become an even bigger player in the market and could increase its market share. Not to mention the higher profit margin that it will enjoy resulting from the cost synergies. In addition, GE also has a strong position in Wind power, an industry growing rapidly. We believe that this deal will bring substantial benefits to the company, and it will also allow GE to use its overseas cash reserves and avoid tax as we indicated in our previous article. We believe GE's focus on its core business has positioned the company very nicely for the future growth and it is an attractive investment for the long-term investors.
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