For General Electric Co., part of Alstom SA’s appeal has little to do with anything the French manufacturer actually builds. It’s about the margins.
Alstom generates more than one-fifth of its sales from servicing the electricity-producing equipment it installs. Boring but profitable, those operations are one of the top draws as GE seeks to buy Alstom’s energy assets in what would be its biggest-ever takeover, two people familiar with the matter said.
The proposed acquisition could help Chief Executive Officer Jeffrey Immelt boost industrial earnings and margins as he reorients GE back toward its manufacturing roots and away from the finance arm. Services in the industrial segment boast margins of about 30 percent, more than twice the 13.4 percent for the entire business last quarter at Fairfield, Connecticut-based GE.
“GE’s general business plan is really attaching high-margin service streams to their installed base of equipment,” said Shannon O’Callaghan, a Nomura Holdings Inc. analyst in New York. “Alstom would bring an installed base of power equipment that GE doesn’t currently have.”
Repairing, maintaining and upgrading power plants generated 4.2 billion euros ($5.8 billion) in 2013 revenue for Alstom, or 21 percent of the total, while services in GE’s power and water unit produced $12.5 billion. Revenue from services across all of GE’s industrial units was $44.8 billion, or about 45 percent of industrial sales, and they provided about 80 percent of the segment’s profit, according to the company.
In addition to gaining Alstom’s service business, GE sees the French company’s steam-turbine operations as complementary to GE’s gas turbines, said one of the people, who asked not to be identified because the sales process is private.
GE also stands to gain Alstom’s electrical-grid business, including assets Alstom acquired from Areva SA in 2010. Alstom beat out GE to buy Areva’s power-transmission business for 2.3 billion euros at the time.
“What GE does not have and what they covet is the transmission and distribution assets that Alstom brings to the table,” said Steven Winoker, a Sanford C. Bernstein & Co. analyst in New York. Adding Alstom’s turbine-making capacity to GE’s would “really be consolidating the industry globally.”
GE declined to comment on the negotiations with Alstom beyond a statement from Immelt on April 28 saying the company is exploring investment opportunities in France. Alstom is based in the Paris suburb of Levallois-Perret.
Alstom’s shares have been suspended from trading in Paris since April 25. GE fell 0.1 percent to $26.76 yesterday in New York. Winoker’s market perform rating is the equivalent of O’Callaghan’s neutral.
Alstom approved plans yesterday to start formal negotiations with GE, according to people familiar with the matter, leaving open the possibility of weighing other offers.
After talks in private for several months, GE now faces a competing bid for Alstom from Siemens AG, the Munich-based company that proposes swapping some rail assets for Alstom’s energy operations. Siemens said yesterday it will make an offer for Alstom pending due diligence.
Immelt met on April 28 with French officials including President Francois Hollande to discuss GE’s bid, which values all of Alstom at about $13 billion excluding debt. GE seeks to acquire the energy divisions, which accounted for about 73 percent of Alstom’s sales last year, people familiar with the proposal have said.
Alstom’s transport unit, the maker of high-speed TGV trains and New York City subway cars, would be spun off in a separate transaction.
Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co., said GE has looked for opportunities to take on Siemens in the European market. Buying Alstom would be a way for GE “to whack Siemens upside the head,” said Langenberg, who recommends GE as buy.
The bid for Alstom comes as Immelt prepares to sell shares of GE Capital’s North American consumer-lending operations, now called Synchrony Financial, later this year. The move is part of Immelt’s strategy to reduce the share of earnings coming from finance to 30 percent from 47 percent last year.
GE Capital imperiled the parent company when access to financing dwindled during the 2008-09 financial crisis. GE has said it expects as much as 20 percent of Synchrony Financial to be sold in the initial public offering, followed by a split-off transaction for the rest of the business in 2015.