General Electric Company (GE) won unanimous approval of the French conglomerate Alstom’s board to acquire its energy assets in a $16.9 billion deal, taking it a step closer to clinching its biggest acquisition ever. The board’s approval came a day after the French Socialist government gave General Electric the go-ahead to acquire most of Alstom energy operations. The deal, subject to customary regulatory and shareholder approvals, is expected to conclude in 2015.
The decision marks the end of a two-month-long skirmish involving intense political negotiations, bids and counter-bids between the U.S. conglomerate and German company Siemens, the other contender for Alstom. (See: GE Improves Alstom Power Bid, Siemens Follows Suit)
The Last Hurdle: Bouygues Stake
General Electric cleared the final obstacle in the energy deal with the French government agreeing to acquire 20% stake in Alstom from its leading stakeholder Bouygues. The arrangement will grant the government an option to buy the stake in Alstom, which will get activated after the closing of the General Electric-Alstom deal and expire after 20 months.
Concerned about preserving France’s energy independence, the government ownership in Alstom was stipulated by Paris as a non-negotiable demand. The share-purchase agreement removes the last hurdle from the U.S. giant’s path, paving the way for its acquisition of Alstom's core operations.
GE: The Final Deal
Per the deal, General Electric has offered to acquire Alstom’s coal and gas turbine operations and form joint ventures in the renewable energy, steam turbine and electrical-transmission businesses, while the French industrial giant will get General Electric’s rail-signaling operations for about $825 million.
The cumulative value of the proposal remains unchanged at $13.5 billion enterprise value and $3.4 billion of net cash, totaling $16.9 billion. The net cash cost of the deal comes to $10 billion, taking the joint ventures into consideration.
Although the numerous concessions and proposed joint ventures in the deal may restrict the potential cost synergies present in an outright sale, General Electric will still be able to gain diversification and exploit the lucrative global energy market. The acquisition will also significantly expand its footprint in a recovering European economy.
The deal will be accretive to earnings in the first year, with General Electric expecting cost savings to the tune of $1.2 billion by the fifth year. The acquisition will also take the conglomerate past its target of generating at least 70% of its earnings from industrial operations.
Alstom, a French industrial icon, is the maker of famed French high-speed TGV trains. The deal will help the company to reinforce its train, metro and signaling operations, and also lower its debt burden. Alstom will reportedly invest about $3.5 billion in the joint ventures with General Electric in steam turbines, renewable-energy and power-transmission.
In order to return to its industrial roots, General Electric has been actively pursuing acquisition targets that promise robust synergies and are immediately accretive. The latest deal, in tune with General Electric’s corporate strategy, heralds excellent return potential, supply chain efficiencies and deep synergies.
General Electric currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include CLARCOR Inc. (CLC), Sumitomo Corporation (SSUMY) and Noble Group Limited (NOBGY). While CLARCOR sports a Zacks Rank #1 (Strong Buy), Sumitomo and Noble Group carry a Zacks Rank #2 (Buy).
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