The General Electric-Alstom Deal Could Create the World's Largest Rail Equipment Maker

In its biggest takeover to date, General Electric (NYSE: GE  ) bought Alstom's (NASDAQOTH: AOMFF  ) power business for $17 billion in the first half of 2014. With this deal, GE has further cemented its foothold in the power and energy segment, and management expects significant synergy gains. Where does this leave Alstom, though? For starters, it's going to be several billions richer, and there are some big strategic advantages, too.


Alstom GT13E2 gas turbine generators, Source: Alstom

Better cash position
The total deal value after GE revised the offer comes to 7.4 billion euros ($10 billion.) A recent Bloomberg report mentions that Alstom could end up with a cash pile of 3.9 billion euros before pensions and 3.66 billion euros after pensions , which could put it ahead of Schneider Electric in terms of having the highest cash balance among European industrials. Alstom's net cash is expected to be more than double that of Schneider's 1.4 billion euros net cash position.

With this cash influx, Alstom can pay down portion of its debt and increase shareholder returns. The company doesn't need to hurry with its debt repayment, though, as Bloomberg reports that only 1.8 billion euro of the 4.65 billion euro of bonds outstanding will mature by 2016. This leaves room for Alstom to strengthen its competitive position against peers such as Ansaldo, Siemens, and Bombardier through acquisitions and organic growth.

Competitive advantage
In the post-takeover scenario, Alstom plans to hold on to its high-speed train making business and buy GE's signaling business for 602 million euros. This would boost Alstom's signaling sales by 40%  and enable the French conglomerate to surpass Siemens to become the second-largest rail equipment maker in the world. Presently, Bombardier is the world's top rail equipment maker by sales, followed closely by Siemens, while Alstom holds the third place.


Source: Bloomberg

Aside from its power joint ventures, Alstom will surface as a pure transportation company and an integrated manufacturer of rolling stock, signaling, and controls systems for mass transit systems. According to Bloomberg analysts, this could give the company governance advantages over Bombardier and Siemens. Alstom also gets to form "Global Rail Alliance" with GE, where among other benefits it will get commercial support from GE in the U.S. and other geographies, assemble GE's diesel locomotives in selected geographies, and service GE's locomotives outside the U.S. 


Alstom-post transition, Source: Alstom Presentation (link opens a PDF)

Ansaldo's management believes that the rail equipment industry is ready to take up another consolidation cycle and will gradually evolve. The future of the industry lies in providing turnkey rail-transit solutions, and companies will have to evolve into fully integrated organizations to accommodate this in the days to come. This will actually be a big change for present-day rail equipment makers that specialize in either signaling or rolling stock. In such a situation, Alstom's management will have the freedom to chase further consolidation options.


How the rail equipment industry might evolve, Source: Bloomberg

Better poised for the changing market situation
In addition to making Alstom a tougher competitor, the deal will also help the French train maker to better position itself for the changing market situation. Ansaldo has predicted that in the period between 2012 and 2015, most of the demand for rail signaling will come from emerging markets. These markets could see a CAGR of 4%-6% compared with the global market, which is expected to grow at 1%-3%.  

Alstom already has a good exposure in the emerging markets as shown in the chart below. With its reenforced cash position and competitive advantages, the company could build more capabilities to meet this demand.

Together with SNCF French Railways, Alstom is currently ready to bid for the Rs 60,000-crore (about $10 billion) Mumbai-Ahmedabad bullet train project. It has extensive experience in high-speed trains, having built the likes of Euroduplex (very high-speed double-decker trains in Europe) and plans to bring its knowhow to growing markets like India.


Source: Alstom Financial Report for fiscal year 2013/2014 (link opens a PDF)

Foolish takeaway
The deal between Alstom and GE seems to be beneficial to both. In addition to providing combination synergies to the American conglomerate, it is also facilitating Alstom's growth. Alstom CEO Patrick Kron believes the arrangement to be a three-fold win: "It provides a future for the activities and employees of Alstom, it has an industrial logic that GE and ourselves called for, and it addresses the government's concerns regarding (France's) energy transition and nuclear sovereignty." To sum it up, the deal has the potential to bring out the best in Alstom.

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