General Electric's (GE -2.20%) proposal to acquire French industrial company Alstom (AOMFF 8.93%) was much simpler when submitted than it is at present. The competing offer from German peer Siemens (SIEGY 0.01%) has created a complex situation, making matters difficult for the American conglomerate. The French government's lean toward Siemens is another challenge in GE's path. Here's the latest update for GE investors.
An uphill battle
GE is witnessing a tough run for its $16.9 billion bid for the energy arm of Alstom as Siemens, Mitsubishi Heavy Industries and Hitachi Ltd. have jointly made an official rival bid of 9 billion euros. Rumors have it that the rival suitor for Alstom, along with the other two confederates, wouldn't mind increasing the bid, as they have substantial financial muscle between them. A person close to the matter said that of the total amount, Siemens would contribute 4 billion euro ($5.4 billion), while the rest would come from the other two.
The two offers differ vastly as Siemens and its allies are looking for Alstom's gas turbine division with small stake in its power division, while GE's bid is for the entire energy wing that forms 70% of Alstom's revenue.
Alstom ECO 100 wind turbine, Source: Alstom.
The desire to take over Alstom occurred to GE after the former did miserably in its quarterly results, and then started looking for a potential buyer. Also, the acquisition will help GE to reduce reliance on its finance business and develop its core industrial operations. Patrick Kron, CEO of Alstom, held separate discussions with Joe Kaeser, CEO of Siemens, and GE's CEO and chairman Jeffrey Immelt to gauge their interest in the company. After sensing cold response from Siemens, Kron continued talks with GE. But Bloomberg leaked their talks in April before they could formally make intentions to the government.
French industry minister Arnaud Montebourg felt deceived alleging that the talks were kept under cover, which translates to "breach of national ethics." Moreover, the French government fears that such external intrusion threats national security. Montebourg denied giving support to the deal, forcing Alstom to warm up to the idea of a rival bid. The government then started looking for other bidders and eventually brought Siemens into the picture.
Siemens initially made an asset swap offer whereby it would take up Alstom's energy segment and offer its rail business in return. Alstom wasn't keen on this association, and neither were Siemens' shareholders. However, Siemens is hell bent to prevent GE from gaining market share in Europe. It also wants to prove a point that despite internal restructuring, it's still competent enough to acquire a unit.
Sweetening the deal
GE is doing all that is required to win the deal. While the company believes that the French government's engagement in the deal is justified, it reaffirms that its "proposal is good for France, for Alstom and for GE." Both the proposers commit to create around 1,000 jobs in France -- a tactic used to woo French officials. The two also promise to have the headquarters of the merged entity in France.
GE feels that the initial offer was good enough, but it had to make the deal more attractive for Alstom to outdo the competing proposal. Immelt met the wary French government on Thursday to alleviate their fear regarding the buyout, and proposed an offer that could be hard to refuse. As per the new deal, three 50-50 joint ventures would be formed with Alstom so that it has significant control over wind power operations and the sensitive nuclear projects.
To further ease concern, the French government would be given preferred shares that would ensure the security of nuclear plants. GE also proposes to give away its rail signaling business to Alstom that will support the latter's transport business, and in return GE would lower the original deal tag price of $16.9 billion -- yet to be calculated.
Le Mans Citadis tramway Alstom transport, Source: Alstom.
Who's got more synergy?
It's important for the French government to assess which deal would bring better operational synergies. Considering GE and Alstom together, the two businesses complement each other. The combination would solidify GE's industrial portfolio and increase its foothold in Europe. Alstom too would benefit from GE's unparalleled technology and range of global customers. With the transaction proceeds, Alstom may develop its transport business, lower debt burden and make dividend payments to investors.
In contrast, sources close to Alstom say that the company's cynical about Siemens' proposal, doubting whether such combination would address core issues regarding the difficult power market, and provide enough cash booster for its transport operations. Moreover, Siemens' proposal is intended toward getting a European buyer for Alstom -- something that the French officials prefer. In fact, it wasn't something that occurred to Siemens in the first instance -- the company was rather persuaded by the French government to make a bid.
Combining thoughts
Beyond a reasonable doubt, GE-Alstom makes a better pair than Siemens-Alstom. Even Alstom senses that and has been in favor of GE's proposal. But the actual pressure to improve the deal terms came from French bureaucrats who added fuel to the fire by bringing Siemens to pitch in. June 23 is the D-Day for GE as the French multinational is slated to decide on whether or not it would accept the deal. Investors should stay alert for updates.
