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Alstom saga ends with a “ménage à trois”
General Electric; Market Cap: $299.6bn (as of 06/11/2015)
Alstom; Market Cap: $9.06bn (as of 06/11/2015)

Introduction
General Electric finally concluded its €9.7bn (about $10.6bn) acquisition of Alstom’s power business after getting the final regulatory approvals. The deal represents GE’s biggest ever industrial acquisition.
GE's offer was accepted by Alstom at €12.35bn in April 2014, but then the French government rightfully forced some changes in the deal structure. To win the approval from the French government, GE’s newest proposition involved setting up joint ventures in renewable energy, electricity grid equipment and nuclear power. In fact, the value of the stakes Alstom will own in the three joint ventures is estimated to be about €2.6bn which means that the net cash cost of the deal for GE is about €9.7bn. Moreover, the US and European regulators required the sell-off of part of the GE’s turbine business to the
Italian Ansaldo Energia in order to keep the market competitive. Before GE got the “green light” from Paris, there was lot of competition between GE and the joint offer of Siemens and Mitsubishi Heavy Industries for the acquisition of Alstom, even though the board of Alstom favoured GE’s clear and simple offer. Moreover, GE promised to add about 1000 new jobs in France, where it has had large existing operations for decades. On the other hand, the government liked the fact that
Mitsubishi-Siemens offer was based on forming a partnership and was not going to be a takeover. Finally, when GE modified its proposal, it won the war.
About General Electric
General Electric, headquartered in Fairfield, Connecticut (US), is a multinational leading corporation with a highly diversified business. General Electric is a key player in the Transportation, Marine, Energy and Mining industries but it also has a solid presence in the Healthcare, Retail and Food & Beverage industries.
Founded in 1878, General Electric has a tradition of innovation and excellence in the Energy division and throughout the years it has been able to explore other businesses, becoming a major player in many industries with a high customer satisfaction. At the moment, General Electric operates worldwide with offices in more than 130 countries.
General Electric’s strong position in the market is given by increasing operating margins (16.2% in 2014 and expected to grow up to 17% by the end of 2016) as well as high R&D of $10bn to $15bn each year.
GE’s operating margin is perfectly in line with the industry average, confirming the competitive position of the firm in its segment. However, ever since the CEO Mr. Immelt arrived, the company has never been able to outperform the market expectations and shares are still priced 30% less than in 2000 under the former CEO, Mr. Welch.
In 2014, GE paid out $10.8bn in dividends and in stock buybacks returning about $30mn to shareholders every day.
The General Electric’s strategy is to become the world’s best infrastructure and technology company, retaining a small financial division. General Electric is planning to drive infrastructure leadership through investments in innovations in order to achieve a greater industrial leadership.
Moreover, the recent formation of GE Digital is consolidating all digital capabilities across the company to provide customers with the best industrial solutions and software as GE keeps winning in the marketplace and delivering strong financial results.
About Alstom
Alstom, headquartered in Levallois-Perret, Paris (France), is an industrial multinational company which operates in the transportation and energy business. Alstom was originally founded in 1928 as the merger between Compagnie Française
Thomson-Houston and the Société Alsacienne de Constructions Mécaniques. About ten years ago, the French government bailed out the company providing more than €3bn in the form of equity investments, loans, and financial guarantees to
Alstom customers. The success of Alstom is the result of a strong focus on environmental and operational excellence achieved thanks to a diverse and entrepreneurial team across the globe.

Find our latest analyses and trade ideas on bsic.it The key shareholder of Alstom is the French government that in June 2014 decided to buy 20% of shares from Bouygues, a
French industrial group which has owned a considerable stake in Alstom, in order to strengthen its position on Alstom that employs thousands of people in France.

For the upcoming years, Alstom is planning to focus only on its transportation business, becoming a global player with offices in more than 60 countries worldwide.
Alstom’s sales and operating revenues increased by 7.63% YoY (from €5.73bn to €6.16bn). Despite growing revenues, an increase in cost of goods sold as a percentage of sales (from 83.90% to 84.97%) was responsible for a decline in net income, YoY, from a gain of €556mn to a loss of €719mn. EPS drop resulted from the reduction in net income. However,
Alstom still has a great liquidity with a quick ratio of 2.94 and a current ratio of 3.02. By 2020, Alstom plans to become its customers’ preferred partner for transport solutions.
Deal Structure
The deal structure turned out to be slightly more complicated than Alstom’s board and GE hoped for. In fact, it turned out to be “a living hell” as far as regulatory approval goes. Namely, the acquisition needed regulatory approval in more than 20 countries and regions, including the EU, US, China, India, Japan and Brazil.
The first part of the deal involves GE acquiring Alstom’s power business. It will take over Alstom’s main coal and gas-fired turbine operations. Adjusting for the 2014 joint ventures, price adjustments for remedies, net cash at close, changes in the deal structure and effects of the currency, the final price will be about €9.7bn($10.6bn). The deal implies the acquisition of
91.5 million Alstom shares by General Electric, almost 30% of the total. The price has been set to €35 per share with an implied premium of about €4 per share. Moreover, GE will sell its rail signalling business to Alstom for $825mn, which had sales of about €400m last year, further decreasing the cost of the acquisition.
The second part of the deal involves setting up three 50-50 joint ventures for Alstom’s grid business, its renewable energy operations, and the nuclear systems. The JVs will deliver services under the GE brand and they will be based in France providing new jobs for the country. The joint venture in renewable energy focuses on Alstom’s Offshore Wind and Hydro businesses. The other JV will create a global Grid business thanks to the combination of the assets of the two companies.
An important thing to note is that the JV in nuclear systems was created in order to assure security and growth of nuclear steam technology for France. The French government acquired 20% stake in Alstom, becoming the company’s biggest shareholder. Moreover, this move made the French state GE’s main partner in three joint ventures. Furthermore, the
French government holds a preferred, or the so-called “golden”, share in this joint venture giving it veto power and special governance rights over issues related to security and technology of nuclear plants. Alstom benefited from liquidity rights with upside sharing and downside protection on the 2.5 billion JVs with General Electric.
This is not the end of the story. The US and EU regulators required the sell-off of part of the General Electric’s turbine business in order to guarantee the competition in the industry. The actual market share of General Electric is 34% and the regulators believed that the acquisition of Alstom could have potentially driven prices higher since the only two big players would have been GE and Siemens. The GE’s large turbine business will be sold for €500 million to Ansaldo Energia, a key player in the industry with more than €1.3bn revenues and a 2014 ROI of 13.5%. Alstom will sell to Ansaldo Energia its
Power Systems Manufacturing unit and it will also cede two test facilities for these turbines in Switzerland. Moreover, the
Italian company will take over Alstom’s long-term contracts gaining a foothold in the maintenance business and having a real chance to compete in the European market. The deal will give Ansaldo Energia the opportunity to double revenues in the upcoming 5 years increasing its market share from 7% to 10% and becoming the 5th player in the industry also thanks to the latest technology it acquired. The reason GE chose Ansaldo Energia, instead of other competitors, is that General
Electric’s management believes that if things will go well for Ansaldo Energia, GE will have a strong competitor but not one to be afraid of. Otherwise, GE will benefit from less competition in the industry.
Alstom said it will buy back about $3.5 billion shares thanks to the new funds provided by the sell-off of its energy business to General Electric.
Deal Rationale
Why is this deal beneficial to General Electric?
The Alstom businesses give GE a much stronger position in steam turbines used in coal-fired, gas-fired and nuclear power plants, and in power grid equipment, as well as a much larger installed base of power plants for its service operations.

Find our latest analyses and trade ideas on bsic.it Moreover, this deal came as a result of GE’s strategy to become a simpler company focused on its industrial business. To be able to execute this strategy, the company decided to spin-off of its store credit business Synchrony Financial and to sell
GE Capital assets, which are worth $126bn, reducing the group’s reliance on its revenues. The Alstom deal puts the company closer to its target of deriving 70% of the group’s earnings from industrial manufacturing and service business and only 30% from financial services, which last year stood at 47% of the group’s earnings. Once both the Alstom deal and the spin-off of Synchrony Financial are finalized, earnings from financial services should drop to c.25%, making the company more attractive for investors who do not want the exposure to the financial services sector when investing in GE. Basically, it is a move that should help GE extract more value by focusing on its core business.

As for the Alstom deal, GE told investors that it expects to realize cost synergies of $3bn during the next five years after the two companies combine their operations. The company expects the deal to be accretive on its earnings. Namely, GE expects the deal to generate .05-0.08 of earnings per share in 2016 and .15-0.20 of earnings per share by 2018.
What about Alstom?
Some analysts wondered if the deal would leave Alstom’s new transport-focused business small and unable to cope with the larger players such as Bombardier, Siemens or the Chinese giants CNR and CSR.
The CEO of Alstom remained confused about those claims, as last year he tried organizing the IPO of Alstom’s transport business and was accused of selling “the family jewels”. He defended the deal saying that the business has more than €5bn in sales and the potential to improve the margins. The transport business of Alstom is solid as it has steady sales and margins growth; therefore there is no need to worry about its size. Alstom’s transportation business has a better strategic position than its energy business so the deal is bound to help Alstom focus on what it does best and extract a higher value of its business. Moreover, as previously mentioned, Alstom is going to buy GE’s signalling operations which had sales of about €400m last year and it has future alliance plans with GE in the rail business. Furthermore, after it collects the deal proceeds, it will use the cash to pay off part of its debt and fund acquisitions. It will be able to have a solid balance sheet and focus on its growth in the transportation industry.

Economic patriotism at its best
Even though the government gave an advantage to the Mitsubishi-Siemens proposal, claiming that partnership would be a better choice than a takeover, it decided to give its approval to GE after it offered similar conditions and was favoured by the board of Alstom. Among other reasons, the Alstom board was supporting the GE offer, in part due to concerns that the rival offer would give Mitsubishi the power to veto future tender bids that competed directly with the Japanese group.
In fact, Mitsubishi competes with Alstom for projects across Europe and Asia.
Arnaud Montebourg, France’s economy and industry minister undoubtedly played a big role in defining the structure of this deal. When the news about the deal leaked in April, the government immediately blocked the offer claiming that this was not just a corporate deal but much more, as a lot of things were at stake. Alstom was bailed out a decade ago by the taxpayers and its main client is the public, this made the deal a national issue. The government was mainly concerned about safeguarding the French control of Alstom’s nuclear business and the jobs of the French people. Therefore, French state decided to buy 20% stake in Alstom by acquiring most of the existing shareholding of Bouygues, the French conglomerate.
And as previously stated, it now represents GE’s main partner in three joint ventures and has veto power with its golden share. During the Alstom saga, Mr. Montebourg and Mr. Valls issued a decree extending the range of sectors subject to state veto on takeovers from defence, technology and betting to include the energy, transport, telecoms, water and health sectors. In the case of Alstom, the government believed it was important to understand that the deal had a wider specter. It was not only a corporate matter but also a political one.
GE was advised by Centerview Partners LLC, Credit Suisse Group AG and Lazard Ltd. Alstom was advised by Bank of
America Corp. and Rothschild.

Find our latest analyses and trade ideas on bsic.it Tags: General Electric, Alstom, Siemens, Mitsubishi, Bouygues, GE Capital, Acquisitions, joint ventures, French government, All the views expressed are opinions of Bocconi Students Investment Club members and can in no way be associated with Bocconi University. All the financial recommendations offered are for educational purposes only. Bocconi Students Investment Club declines any responsibility for eventual losses you may incur implementing all or part of the ideas contained in this website. The Bocconi Students Investment Club is not authorised to give investment advice. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by Bocconi Students Investment Club and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. Bocconi
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