General Electric’s (GE’s) $16.9 billion bid for rival Alstom’s power and grid divisions has set in motion a drama that seems certain to shake up the generation sector worldwide.
GE and Alstom announced the all-cash offer, consisting of $13.5 billion in enterprise value and $3.4 billion in net cash, on April 30. Rumors of the impending deal had begun appearing about a week earlier, alarming members of the French government, who expressed concerned about the future of one of the country’s key manufacturing firms. Even before the deal was announced, the French economic minister, Arnaud Montebourg, was lobbying Alstom’s board to consider other offers, including one from Siemens.
Alstom is one of France’s most important companies—among other products, it manufactures the famous TGV high-speed trains—and its energy division serves markets in thermal, hydro, coal, gas, nuclear, wind, and other renewables. In 2013, the energy division had $15 billion in worldwide sales and employed 46,000 people globally. The transmission and distribution division generated $5.2 billion in sales and employed 18,000. Assuming the deal goes through as planned—something that is far from certain—GE would absorb those businesses, leaving only Alstom’s train division under French ownership.
Alstom, which received a $3 billion bailout from the French government in 2004, has struggled with profitability over the past few years after the downturn in the European economy, and its board appears to believe that it needs help to continue as a long-term concern. Though it is in decent financial health, its low profits have hampered investment and planning for the future.
After lobbying by Montebourg, Siemens’ board hurriedly put together a draft proposal through which the two companies would trade major elements of each other’s businesses: Siemens would take Alstom’s energy division while transferring its transportation division to the French company. That idea lost steam a week later when Siemens’ CEO Joe Kaeser suggested the company would not be pressured into a hasty deal and would not be drawn into a bidding war.
Siemens has yet to tender a formal offer, and observers suggest such a trade would be much less simple than it might appear given major strategic differences between the two companies and substantial overlap in their operations. The GE deal, by contrast, is thought to offer considerable advantages for the American conglomerate, particularly in Asia, in addition to providing a much-needed cash infusion for Alstom’s transportation business.
Unpopular with Paris
Alstom’s board and its CEO Patrick Kron have made it clear they prefer the GE offer, but members of the French government, including President François Hollande, have publicly stated that they are not ready to accept the deal in its current form. On May 15, the energy and economic ministry issued a decree revising a 2005 law, originally covering the defense industry, that gave it the power to block foreign acquisitions in the energy sector.
The move was specifically intended to ensure the deal does not go through unless the government finds it in the country’s interests, Montebourg said. However, observers suggested the move violated European Union rules, and European Commission (EC) finance commissioner Michel Barnier suggested the EC would be watching to ensure the decree was not employed for purposes of protectionism.
The government is understandably concerned about the effects on French jobs—Alstom employs some 18,000 people in France—as well as risks to the national manufacturing base. Montebourg wants to retain some French control over Alstom’s nuclear and gas turbine businesses, and he also suggested the government would require GE to retain a headquarters in France and possibly transfer its train division to what would remain of Alstom.
The bid set off a wave of transactions and speculation across the energy sector, as GE’s rivals moved to position themselves in response. On May 8, Siemens and Rolls Royce announced that they had agreed to a $1.3 billion deal under which Siemens would acquire Rolls Royce’s energy gas turbine and compressor business, including its interest in the Rolls Wood Group joint venture. Siemens also announced that it was relocating the headquarters of its energy division to the United States.
Meanwhile, Toshiba said the same day that it was ready to buy Alstom’s grid division from GE if the deal went through, though GE representatives said no such discussions were taking place and that it had no intention of going through with such a sale.
France’s state-owned nuclear company Areva, which is also a key customer for Alstom’s steam turbines, said on May 20 that it was interested in acquiring Alstom’s offshore wind turbine business. GE CEO Jeffrey Immelt had previously said GE would be willing to offload that division to French investors should the overall deal proceed. Areva and Alstom have been competitors in offshore wind, and such a move would allow Areva to eliminate a rival. GE has reportedly begun talks with Areva and other French companies in hopes of salvaging the acquisition and finding a structure that is palatable to the government.
Alstom’s board, which unanimously endorsed the GE offer before it was announced, has agreed to a 30-day period, ending June 2, during which it would consider other offers, but it has become increasingly unclear that any will be forthcoming.
—Thomas W. Overton is a POWER associate editor (@thomas_overton, @POWERmagazine)