French engineering giant Alstom SA (NYSE:ALS) dropped 15% yesterday on news that the French government would bail out the company in a complicated debt-for-equity deal valued at $2.6 billion. Alstom makes everything from high-speed trains to turbines to boilers. What Alstom doesn't make is money. The French government's role in this potential rescue highlights a stark contrast between American and European capitalism.
Alstom's troubles began in earnest in 2000, when the company purchased a gas turbine division from Swiss/Swedish conglomerate ABB (NYSE:ABB). Since that time, the company has lost more than 5 billion euros (US$6 billion), largely for costly repairs to fix engineering faults in turbines already installed around the world. Last year's tab came to nearly $1 billion, and though it's nearly completed its work, the impact has been crippling. This week Alstom announced that it had lost 1.8 billion euros (US$2.1 billion) for its year ending in March.
That's a brutal mistake, but you know what? That's capitalism. Equity shareholders who bet on the wrong horse can lose everything -- it happens in almost every case where a company files for bankruptcy. Ah, but not in La Belle France. Not with a company that is considered to be a national force that can compete with American and other competitors on the world market. Not when there are thousands of French jobs at stake. Sort of.
France has a long history of supporting money-losing companies that happen to be French: France Telecom (NYSE:FTE) and Bull, among others, have been the recipients of billions of francs and euros of taxpayer bailouts. France is not alone in this regard -- one could point to the various airline bailouts in the U.S., not to mention Chrysler in the 1980s, or Long-Term Capital Management. In this case, though, the driving force is France's drive not to keep Alstom solvent, but rather to keep it French. In a correctly functioning free market system, Alstom should have to sell off assets to meet its financial obligations -- and at least one buyer, Siemens (NYSE:SI), had already identified itself as being interested in Alstom's turbine business.
It's frankly surprising that existing shareholders will be allowed to keep anything. The company is drowning in debt and, without any bailout, would most likely fail without restructuring. So while Alstom shareholders may fret about the terms of the bailout, they should also thank their lucky stars -- even today the company's equity is valued on the open market at US$370 million. Without a bailout, it would be worth exactly nothing. Whatever the equity is worth at the day of the restructure should be considered a direct transfer of wealth from French taxpayers to Alstom shareholders.
Bonne Chance!
Bill Mann owns none of the companies mentioned in this story. For our latest income-generating ideas, check out Mathew Emmert's Motley Fool Income Investor. Afree trialis yours for the asking.
