European Union (EU) officials have approved General Electric’s (GE’s) $9.5 billion acquisition of Alstom’s power business, but conditions to which the two companies agreed to cement the deal will drastically reshape the world’s heavy-duty gas turbine market.
The European Commission, the 28-country union’s executive body, granted its approval to the much-watched proposed merger, but only under the condition that Alstom divests “central parts” of its heavy-duty gas turbines business to Italian firm Ansaldo.
The commission was concerned that the transaction would eliminate one of GE’s key competitors in the heavy-duty gas turbine market. “This would have led to less innovation and higher prices in a market for a technology vital to meeting climate change goals,” it said in a Sept. 8 statement. “The commitments offered by GE address these concerns.”
GE took the lion’s share—51%—of the world’s installed gas turbine megawatt capacity ordered last year, says Bloomberg, citing McCoy Power Reports. That compares with 23% for Siemens, 13% for Mitsubishi Hitachi Power Systems, 7% for Alstom, and 3% for Ansaldo.
The commission’s in-depth review, which focused on markets for the sale and servicing of heavy-duty gas turbines operating at 50 Hz, revealed that a GE-Alstom merged entity would have accounted for more than 50% of the European Economic Area market.
It was also specifically concerned that the merger would have risked eliminating an important innovator. “The transaction as notified would have reduced customer choice, R&D [research and development] and innovation, with serious risks that certain Alstom heavy duty gas turbine models would be discontinued and that the newly developed and most advanced model (GT 36) would not be commercialised. This was of concern for many market participants, including major European power utilities,” the commission said.
The merger was approved on the condition that the parties offered to divest Alstom’s GT 26 and GT 36 turbine technology, existing upgrades and pipeline technology for future upgrades, a large number of Alstom R&D engineers, and two test facilities for the GT 26 and GT 36 turbine models in Birr, Switzerland.
The parties will also need to divest long-term servicing agreements for 34 GT 26 turbines recently sold by Alstom, and Alstom’s Power System Manufacturing (PSM) subsidiary. The commission was concerned that if GE absorbed PSM, it would have eliminated competition for the servicing of GE’s mature heavy-duty gas turbines (like its 9FA model) that are installed in existing plants. “As GE is the dominant player in this market and PSM its most significant potential competitor, this would have created a risk of higher prices and less innovation,” it said.
However, the commission did not find competition issues concerning other parts of Alstom’s power business, including for coal generation, the grid, and renewables. It said that the two companies’ activities in those businesses “are complementary and do not overlap.”
Alstom wanted to quickly seal the deal so the troubled French engineering group can refocus on its transport business and “pursue an ambitious growth strategy.” As part of a remedy package to appease EU officials, the company last month said it would accept $331 million less than the original $13.63 billion purchase price offered by GE to close the deal.
When GE and Alstom first reached an agreement for Alstom’s power business in April 2014, it offered €12.35 billion ($13.77 billion). Adjusting for joint ventures concerning renewables, the grid, and nuclear entities in June 2014, changes in the deal structure, price adjustments, and net cash at close, the purchase price is now expected to be about €8.5 billion ($9.5 billion).
The European Commission’s approval is the last hurdle the parties need to clear before the merger can proceed. Separately, the U.S. Department of Justice, which had expressed concerns about the merger’s potential impact on the 60 Hz heavy-duty gas turbine market, approved the deal on Sept. 7.
GE expects to finalize a deal to divest specified assets to Ansaldo in a transaction that would be expected to close after GE/Alstom transaction has closed, subject to required regulatory approvals.
As of now, both Alstom and GE expect to finalize the merger “as early as possible” in the fourth quarter.
—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)
Editors note (9/9): Corrects and adds details about purchase price.