Mitsubishi Heavy Industries Ltd.’s (7011) joint bid for Alstom SA’s energy business signals its intention to join the top table of equipment makers for power generation.
Building gas turbines and pumps for thermal, nuclear and geothermal power plants already delivers more than one-third of revenues at Mitsubishi, the one-time maker of the Japanese navy’s Zero fighter plane. Moreover, it’s the Tokyo-based company’s biggest contributor to operating profit.
A successful bid for Alstom as part of the Siemens AG-led group that also includes Hitachi Ltd. wouldn’t only trump a rival offer by General Electric Co. but also has the potential to catapult Mitsubishi Heavy into the same league as GE in terms of power generation systems.
“Power is the most important business segment for Mitsubishi Heavy,” said Yoku Ihara, president of Growth&Value Stock Research. “They’re betting that they won’t be able to compete unless they can join top-class players. If GE buys Alstom, Mitsubishi Heavy will be no match for the enlarged company. GE would be by far the top in the industry.”
For Mitsubishi Heavy, which traces its origins to 1884 and the shipyards of Nagasaki, a successful bid would hasten its push to derive half its revenue from energy.
Sense of Urgency
Mitsubishi Heavy’s bid “reflects the sense of urgency that GE’s purchase of Alstom would allow it to hold an overwhelming position in the global gas-turbine markets,” Masanori Wakae, an analyst at Mizuho Securities Co., said ahead of the deal’s formal announcement.
Mitsubishi Heavy executives find themselves at the forefront of Japan’s effort to parlay technical know-how into greater international exposure. Prime Minister Shinzo Abe, for example, has used visits abroad to tout Japan’s expertise in nuclear technology.
Abe and French President Francois Hollande agreed last month that Japan would join a French research effort to develop a so-called fourth generation fast-breeder reactor. Mitsubishi and French reactor developer Areva SA signed a $22 billion agreement in May 2013 to build a nuclear power plant in Turkey.
Mitsubishi Heavy targets a doubling in operating profit at its energy and environment business by March 2019, the company said in a June 10 presentation. Overall, sales are expected to reach 4 trillion yen ($39 billion) by March 2015.
Energy Segment Sales
Sales at the energy and environment segment surged 20 percent last fiscal year alone, according to the company’s most recent earnings statement.
“So far, the size of our business has been too small to compete globally, but we will grow a bit bigger,” Atsushi Maekawa, senior executive vice president in charge of energy and environment at Mitsubishi Heavy, said on June 10, one day before the company said it’s considering the joint bid.
Siemens is offering 3.9 billion euros ($5.3 billion) for Alstom’s gas turbines, while Mitsubishi Heavy and Hitachi would pay 3.1 billion euros for stakes in the steam-turbine, power-grid and hydro businesses. Mitsubishi also offered to buy as much as 10 percent of Alstom, a stake valued at about 900 million euros, while Siemens will explore combining its rail assets with Alstom’s.
Siemens says the combined value of its proposals tops GE’s bid by about 1 billion euros as it includes more assets.
To support their case, Siemens Chief Executive Officer Joe Kaeser and Mitsubishi Heavy Chief Executive Officer Shunichi Miyanaga are scheduled to speak at the economics affairs committee of France’s National Assembly today.
Selling the Bid
“The point is whether they can present the content of their bid as an attractive scheme that would lead to overall growth in terms of employment and technological advancement” and not merely on the size of the offer, said Minoru Matsuno, president of Value Search Asset Management Co. in Tokyo.
Mitsubishi Heavy’s shares were down 11 yen, or 1.8 percent, at 619 yen as of 12:52 p.m. in Tokyo trading today after earlier falling as much as 2.2 percent. The Nikkei 225 Stock Average rose as much as 0.6 percent.
The deal comes at a time of strength for Mitsubishi Heavy. The company posted net income of 160.4 billion yen in the fiscal year ended March 31, its highest since at least 1992. The company has also been paying down debt.
Mitsubishi Heavy had total debt outstanding of 957.5 billion yen as of March 31, 41 percent lower than the 1.62 trillion yen of debt at the end of fiscal 2009, according to data compiled by Bloomberg.
“MHI’s core power systems division, which yields a third of its consolidated sales, generates high, steady profit and cash flow,” ratings company Standard & Poor’s said in a note in April. S&P rates Mitsubishi Heavy BBB+ with a stable outlook.
Mitsubishi Heavy supplies some of the turbines used by Iceland to tap that nation’s underground sources of renewable energy. The company is also expanding into other renewables. In September, Mitsubishi Heavy agreed to form a venture with Vestas Wind Systems A/S to develop offshore wind power plants.
Tokyo Electric Power Co., operator of the wrecked Fukushima Dai-Ichi nuclear reactor, is among Mitsubishi Heavy’s customers.
Mitsubishi Heavy and Siemens in May announced they had reached agreement to form a joint venture in steel and metal production. Mitsubishi-Hitachi Metals Machinery Inc., a company majority-owned by Mitsubishi Heavy, will form the venture with Siemens’s metals technologies division in January 2015.
“Originally, it hasn’t been an aggressive company,” said Mizuho Securities’ Wakae said. “I have a positive outlook on the company’s dynamic reform.”