On June 22nd 2014, one of Europe’s fiercest acquisition battles ended. French Government officially supported Alstom’s purchase from General Electric. During the previous two months, Siemens and Mitsubishi also played important roles in the bid. Both strategic and political reasons lie behind the structure of the deal.
On April 30th, Alstom (€21 billion revenues) presented the details of the proposed acquisition from GE (€120 billion revenues): all assets and liabilities related to the Energy activities transferred to GE for an Enterprise Value of 11.4 billion Euros to be paid in cash.
Source: GE Website
Is the deal value fair ?
By using the comparable method, it emerges that GE has undervalued Alstom. Indeed, GE’s offer implied a EV/EBITDA multiple equal to 7,87, while Damodaran suggesting that a fair multiple for the sector should be equal to 9,78 and Valuemetrics to 10,44. The main reasons of this undervaluation may be the industry trend and Alstom’s recent performance. According to an Ernst & Young research of 2012, the M&A trend in the power and utilities industry has been decreasing in terms of value and number of deals. Considering similar transaction multiples of the recent past in the European market, they confirm the trend and are similar to the ones of Alstom’s acquisition. For example, in 2012 Electricite de France acquired Edison International with a EV/EBITDA multiple of 9.7 and Snam was acquired by Cassa Depositi e Prestiti with a multiple equal to 8.7. Moreover, the whole European energy sector has been facing threats due to the raise of energy resource prices. Alstom has also negatively performed in the last years. In 2013, Net Income fell 28% to €556 million due to higher restructuring costs. Operating Profit fell 3% to €1.4 billion, with Operating Margin dropping from 7.2% to 7% and orders to 10% (€21.5 billion) because of a weak performance in the thermal power division.
The underlying strategy
The strategic rationale behind the deal is to integrate the Alstom energy activities (€14.8 billion revenues and 65.000 employees) within GE to strengthen its development’s prospects. The main sources of synergies are the complementary capabilities among the two firms: GE’s excellence in Gas Turbines and Wind Onshore and Alstom’s superiority in Hydro, Grid, and Steam turbines. Moreover, Alstom could use the cash received to refocus on the transportation sector.
The deal is likely to be very successful due to various elements. It strengthens GE’s position as the most competitive infrastructure Company in the world. Moreover, the type of technology that is going to be acquired is complementary to the existing capabilities of the company, thus increasing the likelihood of benefiting from the potential synergies in the short-term. Indeed, the synergies that GE is going to leverage are concrete and clear because Alstom mostly conducts business in areas where GE is already present, so the learning curve necessary to generate value is not very difficult to be achieved.
The benefits that GE is more likely to achieve are in the power business, especially regarding the production of clean energy. Indeed, the demand of pollution-free energy is likely to increase in the near future, especially from Asian countries like China or India. Thus the acquisition has taken place in an opportune moment in terms of industry cycle and given the huge scale that the company is going to put in place, it will be able to largely satisfy the future demand.
According to estimates provided by GE, the cost synergies opportunities that the company is expected to generate is about $1.2 billion within 2020 (see graph below for a more articulated analysis), a $4 billion increase in operating profits by 2018 and an EPS increase of $.04-.06 within 1 year.
Another relevant factor is the past success in dealing with acquisitions of France and European companies. Among them we remember Jenbacher, an Austrian company that has been the cornerstone of GE’ global distributed power business and that under GE’s control has increased revenues 3x times. This success ranges also from various industries, not only in the power sector, ensuring that the post-merger integration phase will be conducted appropriately by GE given the previously developed skills.
What are the Challenges ?
Although the deal has a huge potential to be very successful, it is not immune to risk. The first important point that GE should be aware of is the strength of the France unions in the context of the France labor market. Any time it will take decisions regarding the firing or the reconversion of the France labor force may be very difficult to be implemented (or may be implemented at higher costs than in other countries of the world).
Another risk factor is the large amount of transactions costs that will be present as soon as the deal will be completed. They mainly derive from the terms of the deal, which require the constitution of three Joint Ventures that were not present in the first bid by GE. Thus, GE will face much more pressure in generating profits given the larger cost structure.
The deal has high chances to turn to be very successful and may be considered as a game changer in the industry. Although the initial terms had to be modified by GE due to the competition that arose from Siemens-Mitsubishi, the benefits are both large and concrete, and very likely to be monetized in the short-term. This is also related to the nature of the estimated synergies. Indeed, they are of the cost-saving type, which have a higher probability to be achieved compared to the growth ones. However, challenges arise from the institutional environment that surrounds GE’s activities in France, where the power of unions is very high as well as the high amount of transactions costs that arose in order to positively conclude the deal.
Gianmarco Bonaita is a Double Degree student of PGP coming from Bocconi University. He completed his undergraduate degree in Business Administration and Management at Bocconi University. He has been elected city councilman and has worked as a collaborator of journal for 3 months. He has had an internship in an Italian SME. He is passionate about travelling, skiing and photography.