G.E.’s Bid for Alstom: Getting a Mutually Agreeable M&A Deal Done

Recently, a final bid was approved by the French government for General Electric Co.’s acquisition of Alstom SA. Although the two companies have been in negotiations for two months now, a series of string-pulling was needed to seal the deal. Here, a brief overview is given of the acquisition and its key players.

Alstom SA

This is a French multinational company that focuses on electricity generation and rail transport. In fact, it manufactures France’s TGV high-speed train. The company is currently listed on the Paris Stock Exchange. Patrick Kron is its chairman and CEO. Reported earnings for the past year were $27.6 billion, two-thirds of which came from its energy business.

General Electric Co.

Not much explanation is needed for G.E.’s history as a major industry leader in the U.S. However, I will mention that total revenues in 2013 were $146 billion and reported on its balance sheet were $88.5 billion of cash and equivalents. Currently, Jeffrey Immelt is the CEO.

Original Bid

In April a bid from G.E. valued at $17 billion was accepted from Alstom for the company’s power and grid divisions, including its wind turbine business and oversize steam turbines used in nuclear power plants. Also, G.E.’s current P/E ratio is 21.62 while Alstom’s is at 15.15, indicating that the deal will be accretive.

A Fight for European Power

Shortly after the original bid was announced the French Economy Minister, Arnaud Montebourg, felt personally offended that Alstom would consider offers behind the government’s back, given that it employs about 18,000 people in France and is a symbol of French technological power. So, the government passed a decree to reserve the power to approve or block takeovers from foreign groups in strategic sectors.

In attempt to further conserve France’s stake in Alstom, Mr. Montebourg brought in Seimens AG, the German engineering and electronics conglomerate. After all, if other investor were to come to the table, a German partner would be closer to home and help to bolster France’s economic standing in the European Union. Moreover, Siemens is a direct competitor for G.E. and similarly saw Alstom’s gas-turbine business as an attractive investment, but wasn’t interested in acquiring all of Alstom’s operations. Thus, they got Mitsubishi Heavy Industries of Japan involved to purchase a minority stake in the rest. Each presented their respective bids, the sum of which fell short of G.E.’s offer by $10 billion, and Mr. Immelt quickly went to work to slow the momentum of a bidding war.

A Revised Bid

After a series of trips to Paris and some negotiation with Mr. Montebourg and President François Hollande, G.E. presented a revised bid to appease government demands and secure their blessing for the acquisition of Alstom.

In a deal valued at $13.5 billion, G.E. agreed to sell its railway signaling systems to Alstom for $1.36 billion, create 1,000 jobs in France – a clause that includes a €50,000 penalty for each job that falls short of the quota – and grant veto rights to the French government for nuclear contracts. G.E. will bring $3.4 billion cash to the deal and will acquire the French company’s operations in manufacturing natural gas turbines for power plants and its valuable customer base. As proposed by Mr. Immelt to appease the French government, three 50/50 joint ventures with Alstom will be created for steam turbines, renewable energy, and electrical grid systems. Finally, to maintain Alstom as French as possible, the Bouygues family, the company’s major stakeholder, agreed to give the French government 20 months to purchase up to a 20% stake in Alstom beginning at the closing of G.E.’s acquisition; if the French government fails to do so within that allotted, then only a 15% stake will be allowed. The deal is expected to be finalized by early 2015.

Ultimately, this deal will allow G.E. to expand its industrial operations as it gains entry into fast-growing markets in Asia and expand its power and energy businesses. The revised bid isn’t the same as what they originally had in mind, but Mr. Immelt says that he still feels everyone wins with the new terms.

Note: Much of the information in this article was provided from the following authors in the Wall Street Journal: Inti Landauro, Stacy Meichtry, and Ted Mann.

Andrew Dunnington
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