The Alstom deal close to a denouement
All the players in place, it is time for the ultimate bargaining.
GE is pushing forward with its offer for a takeover of Alstom’s energy business unit. Steve Bolze, chief of GE’s power unit, met French Minister of Industry Arnaud Montebourg at the end of last week to discuss the key details of GE’s $17B bid. The discussion included four issues; France’s guaranteed access to critical nuclear technology, the possibility to add GE’s locomotive business to the deal that would include a swap of this business in favor of Alstom against Alstom’s energy unit. The transfer of Alstom’s wind turbine business to a third party, and guarantee on maintaining and developing employment and technology in France.
As far as the guaranteed access to nuclear technology, the discussions are going on with the support of Areva, the state owned French nuclear industry giant. GE has turned down the proposition for combining its locomotive unit with Alstom’s transportation business and is offering in exchange the possibility of a joint venture in the rail signaling business. Areva is showing interest for Alstom Wind turbine business and will very likely make an effort in that direction. GE promises to maintain and develop employment in France and seems to be ready to back its promise in turning Belfort’s plant into its Thermic Energy Headquarter for Europe, and in transferring to France its global smart grid, hydro power, and wind power businesses headquarters.
The French government’s reaction is that GE’s offer remains unacceptable, which is an indication of a bargaining posture kept until Siemens offer is coming out. The German company is working hard on a proposition that should be made public imminently and all we know about it for now is that Siemens is offering a swap of Alstom’s power business for Siemens’s transportation unit. The big advantage of this approach is political. It creates the impression that France is saving face in keeping at home a business considered prestigious because it includes all activities related to the TGV (The French high speed train). It also gives evidence of the government’s interest for building a real pan European industry that would include one energy “champion” headquartered in Munich and a transportation “champion” headquartered in Paris or Belfort. Some experts are pointing out that the deal may be slightly unbalanced; the global energy business is on the verge of a massive global transformation that has no equivalent in history whereas public transportation’s potential is much more limited with only 3.5% growth rate expected for the next decade, and with very fierce local competition in every key market such as China, India and Brazil. No matter what, with recent involvement of Angel Merkel and of the European Commission, this bid is taking a European political dimension that GE would certainly have preferred to avoid. One reason of Brussels’ involvement is French government’s last week ordinance that is extending the number of industries considered critical to the nation that now includes energy.
Our opinion is that GE’s offer is keeping the lead thanks to unanimous support from Alstom’s board that will ultimately make the decision. Can this situation change? It all depends on how far Siemens is ready to go in its offer. It will be difficult for the German giant to match GE’s $17B offer but Siemens can make its counterbid more attractive in different ways. One is in offering even more to the table beyond its transportation business. Siemens could for instance be matching GE’s offer in moving its smart grid or wind turbine businesses headquarters to France.
A third option raised by the French government last week was the possibility to be directly involved in the deal. In this approach, the French government would buy a stake in Alstom’s equity that could be equal to the stake purchased by Alstom’s acquirer. This is a set up very similar to the one adopted for car company Peugeot a few weeks ago. Originally, the Peugeot family wanted to sell most of its equity to Chinese conglomerate Dongfeng Motors but the deal ended with a joint participation of the French government. Now, the Peugeot family still owns 14% of the company (vs. 25% before the deal) with Dongfeng Motors and the French government owning the same amount of equity. Our opinion is that it is very unlikely that GE or Siemens would agree with a deal of this kind. Furthermore, the new French government being involved in a major cost cutting effort will not have any money to put on the table.
The final denouement is close. Now it all depends on how far President Hollande is ready to go in order to please Ms. Merkel and on how creative Siemens will be with its counteroffer knowing that timing is very bad for the German company that just started a major restructuring effort. Thanks to our very comprehensive news coverage, our subscribers are following this deal very closely.