Please ensure Javascript is enabled for purposes of website accessibility

What You Need to Know About GE's Alstom Deal

By Lee Samaha - Dec 8, 2015 at 1:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The industrial giant's latest acquisition offers growth as well as cost synergy.

General Electric Company (GE 0.94%) recently updated investors on its acquisition of Alstom's power and grid assets.The deal is an integral part of the company's refocusing on its industrial businesses, and management outlined a number of initiatives that strengthen the case for buying the stock. It's been thought of as a play on cost-cutting, but management outlined a number of growth initiatives as well. Let's take a closer look.

Headline numbers
The delay in completing the deal has had both good and bad effects:

  • The original price net of cash was $13.5 billion, but it's now reduced to $10.3 billion, partly because of favorable currency movement of $2.5 billion.
  • Guidance was for a $0.01 to $0.02 reduction in EPS in 2015, because of accounting items and deal costs related to the Alstom acquisition.
  • Management discussed how the delay had negatively affected Alstom's underlying operations.

There is a slight reduction in expectations for the contribution to 2016 EPS. However, the expected $3 billion in annual cost synergies by 2020 is still in place, and the forecast for EPS accretion for 2018 remains the same.

 Metric

At Initial Announcement

At Year-End 2014

May 2015

Current

2016 EPS impact ($)

$0.08-$0.10

$0.06-$0.09

$0.06-$0.09

$0.05

2018 EPS impact ($)

N/A

double-digits

$0.15-$0.20

$0.15-$0.20

Cost synergy by 2020 ($billions)

$1.2

$1.2

$3

$3

DATA SOURCE: GENERAL ELECTRIC COMPANY PRESENTATIONS.

The following is a graphical interpretation of how the $3 billion in cost savings will be achieved, including figures for synergy investments.

DATA SOURCE: GENERAL ELECTRIC PRESENTATIONS.

Strategic fit, growth synergy
But enough about cost synergy: What about growth synergy? It's easy to think of the deal as merely an attempt to consolidate a slow-growing industry suffering from overcapacity -- a fine activity in itself -- but it also creates growth opportunities for General Electric to grow, and to grow using strategies integral to its future.

This approach works in three ways: first, by refocusing on industrial business, in this case with the expansion in sales of its new H-class turbines; second, by expanding its higher-margin services offering; and third, by increasing long-term value in its business through the industrial Internet.

During the course of the presentation, management discussed various ways to achieve these goals:

  • Alstom will add 50% to General Electric's installed base in terms of power, and 60% in terms of units, meaning that GE can immediately expand its services offerings.
  • Alstom's installed base can be digitalized through GE's industrial Internet solutions, adding monitoring and diagnostics capabilities and helping to add value.
  • Management discussed creating the capability to service the equipment of other manufacturers -- such as Siemens and Mitsubishi -- thanks to the technology collaboration with Alstom. This initiative is viewed as being a $100 million revenue opportunity by 2020.
  • Alstom's leadership in steam power will allow GE to improve its combined-cycle (steam and gas power) plant offerings and create cross-selling opportunities.
  • The company claims that its new HA turbine (a larger power turbine) already has 40% of its marketplace and claims multiple synergy opportunities with Alstom's solutions.

Ultimately, management quantified its growth synergy opportunity at around $600 million by 2020, but this figure might change in the future if the company extends leadership in gas turbines or increases the value add in its industrial Internet solutions.

The takeaway
It was a positive update for investors, and management confirmed that "growth opportunities" are "better than the original outlook." Meanwhile, the annualized cost synergy of $3 billion remains the target for 2020. The integration remains on track.

All told, it's good news, as integrating Alstom is a major part of the investment case for buying General Electric. It gives the stock upside from internal execution as much as from profiting from end markets. That's a good quality to have in a slow-growing economy, and one that gives the stock the opportunity to continue to outperform its sector.

Lee Samaha has 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$74.36 (0.94%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.