Can Alstom Get Back on Track?

It's a financial wreck, and the rescue plan may not work

Arriving at the annual meeting of French engineering group Alstom in Paris on July 2, Chief Executive Patrick Kron found the building entrance surrounded by angry employees, protesting his plan for mass layoffs. Inside the meeting hall, the mood was just as ugly. Two days earlier, Kron had disclosed Alstom would take a $58 million charge because of accounting irregularities at a U.S. subsidiary, deepening the company's fiscal-year losses to $1.56 billion, on sales of $24 billion. Shareholders booed and hissed as Kron and his team asked for their support of a new share issue -- without which, the executives warned, Alstom's creditors could liquidate the company.

Not long ago, such disrespect would have been sacrilege. When Alstom was listed on the Paris, New York, and London stock exchanges in 1998 -- the biggest European initial public offering that year -- it was an icon of French technological prowess and global ambition. Alstom's transportation division builds France's fabled high-speed trains and supplies subway equipment to New York City and London. One-fifth of the world's electricity is generated by Alstom-built power plants. The Queen Mary 2, the biggest ocean liner ever, is under construction at Alstom's shipyards on France's Atlantic Coast.

But today, Alstom is a financial wreck, brought low by weak demand for its wares and a crushing pile of off-balance-sheet liabilities. Over the last two years, Alstom has lost $1.7 billion, its debt has soared above $5 billion, and its share price has fallen 90% to $3.38. "Alstom's future is in the hands of the banks. Its shares are worthless," says Andrew Carter, a London-based analyst for Deutsche Bank.

The French government is clearly eager to prevent Alstom from going bust. Areva Group, a state-owned nuclear company, has offered to buy Alstom's electrical transmission and distribution business, which the company badly needs to sell to pay down debt. State-controlled companies such as Gaz de France have placed new orders at Alstom shipyards. France's regional governments are being pressured to buy more trains from Alstom. "Thanks to our joint efforts, Alstom [can] regain its health," Industry Minister Nicole Fontaine told French lawmakers in a recent speech.

Yet Alstom's saga illustrates a sobering truth: The days when France could resuscitate a sick national champion are probably over. A few French commuter-train contracts won't cure a company that does 90% of its business outside France. And while Areva hasn't revealed details of its bid, European Union regulators would certainly question the offer if it appears to overvalue the transmission and distribution unit -- in other words, if the bid is state aid in disguise.

Whether Alstom can remain a viable business now depends largely on Kron, a straight-talking manager who spent most of his career at French metals group Pechiney before being named to replace former Alstom CEO Pierre Bilger last November. Kron has laid out an ambitious rescue plan. He's already halfway to his target of selling $3.4 billion in assets to pay down long-term debt. He's also securing new credit lines, and planning a capital increase to help pay up to $2.3 billion in debt maturing in 2004. And he has launched a two-year restructuring push that, when complete, is expected to trim $570 million in annual operating costs by reducing manufacturing capacity and eliminating 5,000 jobs in Europe. "Patrick Kron has exceptional qualities for handling a crisis," says Aimery Langlois-Meurinne, the supervisory board chairman of metals group Imerys, where Kron was chief executive immediately before joining Alstom. But, he adds, "this is such a big crisis, I don't know if anyone can handle it."

How did Alstom fall so far, so fast? In an interview at his office near the Arc de Triomphe, Kron says the company was a victim of forces beyond its control. After absorbing a former unit of Swedish-Swiss ABB Group in 2000, Alstom learned of major flaws in gas turbines that the unit had sold earlier. Fixing the problem will cost Alstom at least $4.5 billion. At the same time, demand for power plants has plummeted in the past few years as electric utilities scale back expansion plans. Another major Alstom market, the cruise ship business, has fallen on hard times during the economic downturn. "None of these factors alone would have produced such grave consequences, but together, they did," Kron says.

Fair enough. But Alstom's previous management made things worse by repeatedly assuring investors that the company's problems were under control, only to acknowledge later that the woes were far worse than previously disclosed. For example, in September, 2001, former CEO Bilger announced that Alstom faced minimal liabilities from the collapse of Renaissance cruise lines, for which the company was building ships. Shortly afterward, however, Alstom announced it was taking a $125 million charge for off-balance-sheet vendor financing to Renaissance. Likewise, Alstom has repeatedly surprised investors with new charges related the the faulty ABB turbines. Adding to investors' ire, Bilger's employment contract allowed him to collect a $4.6 million bonus. "It's shocking," says Pierre-Henry Leroy of Proxinvest, a Paris-based shareholder advisory group that is pressing Alstom to let shareholders vote on the bonus package.

Still another unpleasant surprise bubbled up in late June, when Alstom disclosed accounting irregularities at its U.S.-based train unit, Alstom Transportation. After Alstom employees raised questions about a $280 million contract signed in 1999 with New Jersey Transit, the company brought in outside auditors who identified $58 million in unreported losses. Kron says that because the New Jersey contract was the unit's first major deal after Alstom's IPO, local managers submitted a low-ball bid and then tried to mask resulting losses by assigning them to other contracts. Now, the FBI and the Securities & Exchange Commission are investigating, and Alstom's auditors are reviewing other contracts signed by the unit, whose customers include Amtrak and the New York's Metropolitan Transportation Authority.

It's too early to tell whether Kron will be able to clear away the detritus of past mistakes quickly enough to reassure investors. But if he can, a slimmed-down Alstom could probably regain its health. The train-building and power- generation businesses are solid cash producers with big global markets. On the other hand, the shipbuilding unit, which has few major contracts after the scheduled delivery of the Queen Mary 2 this year, will probably need to team up with another shipbuilder to survive. Alstom's days as an icon of French engineering seem numbered. Its time as a smaller, viable company may just be starting.

By Carol Matlack in Paris

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