August 12, 2014

GE deal will strengthen Alstom’s rail business

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''EVERYONE is a winner," Mr Patrick Kron, Alstom's CEO, declared on June 24 during a visit to the company's power plant in Belfort together with his new partner Mr Jeff Immelt, chairman and CEO of General Electric (GE). The visit took place the day after Alstom had finally approved GE's bid for its energy business, thereby ending months of negotiations and political wrangling over the future of Alstom.

What started out as private negotiations between the CEOs of two private companies over a plan to sell Alstom's troubled energy division to GE leaving Alstom as a purely railway business, came unstuck in late April when France's industry minister Mr Arnaud Montebourg finally realised that part of one of the country's industrial icons was about to be sold to a US company, with possible consequences for the future of Alstom's rail business and TGV, a powerful symbol of French engineering prowess.

Montebourg quickly engineered a rival bid from one of Alstom's main competitors Siemens, forcing GE to extend the validity of its offer. Siemens soon joined forces with Mitsubishi Heavy Industries, Japan, to mount a rival bid. In the meantime France issued a decree allowing it to block foreign takeovers in strategic sectors of the economy.

As far as rail is concerned, the Siemens proposal was designed to create a rail champion by immediately offering a joint venture in signalling with Alstom, but with Siemens as the dominant partner, and a proposal to merge the two companies' train manufacturing businesses. While last year's takeover of signalling specialist Invensys by Siemens was quite a good fit because the two companies complemented each other in terms of technology and geographic market presence, merging Siemens and Alstom would have been a messy affair despite a pledge by Siemens for a three-year moratorium on redundancies. Each company produces a complete range of rail vehicles from locomotives and high-speed trains, to commuter and metro trains, and light rail vehicles, and are both present in large parts of the world. It is difficult to see how a merged company would continue to sell two separate ranges for every type of rail vehicle. How long would it have been before a major rationalisation of manufacturing plants and personnel would have been necessary? Would TGV have survived this?

A merged company would not necessarily become a stronger player in the market as it would be bidding for contracts as a single entity in competition with others. The merger could also have allowed other companies to enter the market or to strengthen their position. As SCI Verkehr's assessment of the world's top 10 rolling stock manufacturers clearly shows, the market is dynamic, with Siemens dropping to seventh place having been overtaken by Transmashholding, Russia, and Stadler.

In the end, the entry of Siemens/Mitsubishi Heavy Industries into the competition resulted in GE modifying its offer, which was accepted, and prompted the French government to take a 20% stake in Alstom. This is the second time the government has invested in Alstom as it took a similar-sized stake in 2004 as part of a rescue package for Alstom caused mainly by problems in its energy and former shipbuilding divisions.

Under the deal, which is expected to be completed next year, GE will acquire Alstom's thermal power energy division for €12.35bn. Alstom will use €2.5bn to enter into three 50:50 joint ventures with GE involving renewable, grid, and nuclear energy. Kron says the remaining funds will be used "to reimburse debt, ensure Alstom's structure is robust, return some cash to shareholders, and to create value in the future."

Alstom will also acquire GE's signalling business. This has around €400m of sales, of which 60% is in North America. Alstom says the acquisition will boost its own signalling sales by 40%, make it a leader in North American freight signalling, strengthen its position in the new Positive Train Control market, provide it with a wider range of products, and give it better geographic coverage.

In addition, Alstom will receive commercial support from GE, and will be allowed to assemble and service GE locomotives in certain parts of the world. There will be mutual or joint sourcing of components and development of products and technology. GE Capital will support some Alstom projects; allaying fears that a smaller Alstom would no longer be able fund major projects such as its recent train deal in South Africa.

Alstom currently has sales of €20.3bn of which only €6.2bn is for rail. After the deal goes through, total sales for Alstom will drop to around €10bn, with rail accounting for two-thirds rather than one-third today.

In future, Alstom will become not only a stronger player in the rail business, with GE's help, but its management will also have a much greater focus on rail. Looking ahead, the rail partnership with GE could develop further. Alternatively, as a smaller, rail-focused company, Alstom could become prey to a hostile takeover, especially if the French government eventually decides to dispose of its holding in Alstom as it did previously when the company had been restored to financial health.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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