Alstom Takeover: Too Important To Pass Up

Siemens is unlikely to easily concede Alstom's power assets to General Electric (GE) and we expect the German company to submit a competitive counter-bid for Alstom's energy business by the end of May. While there are currently several overlaps between Siemens' and Alstom's energy businesses, we believe the stakes are too high for Siemens to not submit a competitive bid. That said, we note that Siemens has significantly less room to manoeuvre than GE based on its financial position. We also note that the French government will play a key role in determining the eventual acquirer of Alstom.

On April 29, several major media sources reported that French engineering group Alstom had accepted a cash offer of EUR10bn from US-based General Electric (GE) for its energy unit. This announcement comes just two days after Alstom's German rival Siemens had submitted a letter to Alstom's board, stating its intention to intervene in the acquisition. At present, media sources have reported that the board of Alstom remains open to a counter bid from Siemens, which is currently undertaking due diligence. Alstom's energy business accounted for just over 70% (or EUR15bn) of the company's global revenue in FY2013, and this deal is contingent on the approval of the French government.

Stakes Too High To Fold

Power The Dominant Business
Alstom - Revenue By Business, EURmn

Alstom Takeover: Too Important To Pass Up

Siemens is unlikely to easily concede Alstom's power assets to General Electric (GE) and we expect the German company to submit a competitive counter-bid for Alstom's energy business by the end of May. While there are currently several overlaps between Siemens' and Alstom's energy businesses, we believe the stakes are too high for Siemens to not submit a competitive bid. That said, we note that Siemens has significantly less room to manoeuvre than GE based on its financial position. We also note that the French government will play a key role in determining the eventual acquirer of Alstom.

On April 29, several major media sources reported that French engineering group Alstom had accepted a cash offer of EUR10bn from US-based General Electric (GE) for its energy unit. This announcement comes just two days after Alstom's German rival Siemens had submitted a letter to Alstom's board, stating its intention to intervene in the acquisition. At present, media sources have reported that the board of Alstom remains open to a counter bid from Siemens, which is currently undertaking due diligence. Alstom's energy business accounted for just over 70% (or EUR15bn) of the company's global revenue in FY2013, and this deal is contingent on the approval of the French government.

Power The Dominant Business
Alstom - Revenue By Business, EURmn

Stakes Too High To Fold

We believe that Siemens is unlikely to easily concede Alstom's power assets to GE and expect the German company to submit a counter-bid for Alstom's energy business. While there are currently several overlaps between Siemens' and Alstom's energy businesses (these overlaps could create operational redundancies in the event of an acquisition by Siemens), the stakes are too high for Siemens to not submit a competitive bid. This is because an acquisition of Alstom by GE would give the American company a massive boost in its product offerings and market share in the global power equipment market. Some of the synergies that GE would experience as a result of the acquisition include:

  • Transmission and distribution (T&D): All three companies in question are major T&D equipment makers and solutions providers, but Siemens has a larger share of the global market than Alstom and GE. An acquisition of Alstom's power business would help to fill several gaps in GE's T&D and automation offerings, and materially increase its market share. For instance, the combined sales of high voltage direct current equipment of Alstom and GE exceeds Siemens, currently the global leader for such equipment. GE would also gain a strong foothold in the European grid market as Alstom had acquired Finnish T&D equipment manufacturer Nokian Capacitors in 2010.

  • Thermal generation: Alstom, GE and Siemens are among the top five largest manufacturers of gas turbines globally, and an acquisition of Alstom by GE would make it the undisputed leader in this industry. GE would also gain a strong foothold in the European power generation services sector.

  • Nuclear generation: According to Alstom, the company is the world's top supplier of turbine generators for nuclear plants and provides ancillary equipment for 40% of the world's nuclear power plants. GE's current exposure to nuclear energy is mainly through a joint venture formed with Japan's Hitachi in 2007, and the venture has only worked on three projects to date. An acquisition would give GE a tremendous foothold into the global nuclear sector and boost its product offerings. Conversely, Siemens had exited the nuclear energy sector in 2011 following the Fukushima accident in Japan.

  • Renewable energy generation: Siemens and Alstom compete fiercely in the global renewable energy sector, with significant presences in offshore wind power and hydropower (Alstom has stated that the company's hydropower turbines and generators can be found in over 25% of the world's hydropower installed base). On the other hand, GE has an extremely limited presence in offshore wind and hydropower, and an acquisition would push it to the forefront of the renewable energy sector.

We highlight that Siemens has long had its eye on Alstom's power division. The German company had expressed interest in acquiring parts of Alstom in 2004, when the latter was undergoing financial duress. However, the French government had intervened in the possible acquisition by offering Alstom a state-backed restructuring scheme worth EUR4.4bn.

GE-Alstom A Credible Threat To Siemens
Power Division Revenues by Company, EURbn

Counter Offer Expected

We expect Siemens to submit a counter-bid. The company had sent a request to Alstom to be given access to non-public data in order to do due diligence over a four-week period. French newspaper Le Figaro had also reported that Siemens was willing to offer its train-making business plus cash in exchange for Alstom's power division in a deal valuing the company at around EUR10-11bn.

That said, we note that Siemens has significantly less room to manoeuvre than GE based on its financial position. Siemens reported cash holdings of EUR9.2bn at the end of FY2012/13 (October-September), while GE ended 2013 with a cash pile of USD89bn. As such, Siemens might have to liquidate some of its short-term investments, commit its receivables to the deal (providing it up to EUR15bn) and/or draw upon a EUR6bn revolver facility (which expires in 2018) in order to make a competitive bid. In contrast, GE has significant headroom to maneuver given its significant cash holdings, and we believe it is extremely keen on acquiring Alstom's power assets given a deceleration in organic growth in its Power and Water unit in recent quarters ( see 'GE Order Underscores Power Sector Opportunities', November 27 2013).

GE Power: Heading Down Since 2009
GE - Revenue and Net Income from Power Business, USDbn (LHS) and Revenue from Power Business, % of total revenue (RHS)

Government Crashing The Party

We believe that the French government will play a key role in determining the eventual acquirer of Alstom. The French Minister for Economy Arnaud Montebourg is believed to have been the chief proponent in negotiating the last-minute intervention by Siemens. The minister also said that the French government would block any deal it considered contrary to its long-term interests. This heavy involvement by the French government is due to three factors:

  • Employment: Alstom is one of France's top private-sector employers. About 20% of the company's workforce is located in France (18,000 employees), against GE's 10,000 French workers and Siemens' 7,000. Given the large overlaps between Siemens' and Alstom's businesses, we expect that a takeover by Siemens could result in greater operational redundancies and job losses than a takeover by GE.

  • Independence: The independence of France's nuclear industry is crucial to the country's energy security as France is heavily reliant on nuclear generation for electricity. As such, we believe that the government would try to minimise or prevent a major transfer of proprietary technology and processes out of the country.

  • Politics: The deal has gained significant public attention and is likely to have a major bearing on the popularity of the French government in the run-up to the European elections. As it is, we have already seen voices of disapproval from opposing political parties. For instance, the leader of the far-right National Front (opposition) party, Marine Le Pen, said that the government had 'abandoned Alstom to be dismantled for American or German profit'.

We note that the government has the power to block the deal. In 2005, the government had passed an anti-takeover decree amid speculation that French dairy-products maker Danone might be acquired by PepsiCo, and the legislation is still in effect today. The government also exerts a large amount of control over the French rail and power sector through state rail operator SNCF and partly state-owned power utility EDF, and Alstom is unlikely to want to hurt its ties with these companies.

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