General Electric's CEO hopped a red-eye flight to Paris on Monday morning, and either he's craving an authentic croissant or looking to smooth talk French politicians ahead of a potential merger. For what it's worth, I'd go with the latter.
After all, GE will face some hurdles as it tries to finagle a blockbuster deal for the power business of France's industrial giant Alstom. Already, company leaders and politicians were scrambling over the weekend to evaluate GE's reported $13 billion offer from every possible angle. As I pointed out last Thursday, GE would likely have no issue with financing the deal, thanks to a $57 billion pile of cash overseas. On the flip side, Alstom's CEO announced last November that part of its transport business could hit the auction block in an attempt to -- you guessed it -- raise much-needed cash for the company.
With these two factors in mind, French politicians could find it hard to keep a deal from unfolding according to "the General's" master plan. But that doesn't mean there won't be a few obstacles for GE this week and in the months ahead.
First off, French politicians seem reluctant to consider any deal that would allow an American company to assume control of even a fraction of their premier industrial outfit. This is perhaps due to concerns that such a move could lead to relocated operations, a loss of jobs, or a shift in the country's approach to energy independence. From the perspective of France's economy and industry minister, Arnaud Montebourg, there's no reason why a "national jewel" like Alstom should be chopped up and sold "behind the backs of the workers, the government, most of the board and its leading managers" and "steered from Connecticut." Obviously, a dose of protectionism could play a part in the outcome.
On top of that, there's an undercurrent of solidarity in the European Union, which could result in French politicians courting GE's rival, the German industrial company Siemens, to step in and work out a deal. Already, Siemens has expressed interest in an asset swap that would see Alstom's power business -- the same one that caught GE's eye -- end up with the German counterpart in exchange for its own transportation assets. Such a swap would also entail a "significant" amount of cash to be transferred to Alstom shareholders as was reported by the Financial Times on Sunday. At this point, however, both proposed deals hang in limbo and Montebourg proclaimed over the weekend that the French "will not accept a decision in haste."
These two challenges overhang a potential near-term deal for GE, without even considering the necessary approval from Alstom's board, which would need to be convinced of the deal's merits for shareholders. And if that were to happen, the megamerger would still need approval of regulatory bodies like the EU due to potential antitrust issues. In this regard, a deal with Siemens would likely face more scrutiny in that scenario than one with an American company like GE.
So, what does this mean for GE investors today? Well, first and foremost, GE's obviously very interested Alstom's valuable assets. Immelt's meeting with the president of France indicates this is much more than speculation in the financial media.
Further, GE is in a position of strength since it made the first move to acquire Alstom's power business at a time when the French manufacturer could use a cash infusion. Siemens, meanwhile, might have been caught off guard with the proposition altogether. Imagine your neighbor, for example, getting an unprompted offer for their coveted SUV and then coming over to ask you if you can buy it instead of the guy down the street. That might not be the best way to go about purchasing a used vehicle.
Finally, if GE in fact walks away empty-handed, it won't be the worst outcome for shareholders. There's enough on GE's plate right now with the upcoming retail finance spin-off, which could ultimately raise more cash to conduct buyouts with down the road.
Investors might not have foreseen such a substantial purchase around the corner, but at this point a lot of pieces need to fall into place before GE writes a check to Alstom shareholders. For now, take comfort in the upside of a deal without fretting over the fallout should GE hit a wall in Paris.