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

Alstom could sharpen its competitive edge substantially once it gets ahold of GE’s signaling business.

Jul 22, 2014 at 6:06PM

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.

Images
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.

Images
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. 

Presentation Agm
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.

Images
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.

Consolidated
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.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 9:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers