Siemens Missing Profit Estimate Shows Alstom Tie-Up Risk

Siemens AG and Alstom SA both reported earnings that missed estimates on charges for large infrastructure projects and reorganizations, highlighting the pitfalls of Europe’s biggest engineering company bidding for the energy business of its smaller French rival.

Siemens, working to counter a $17 billion offer by General Electric Co. for Alstom’s energy unit, today posted 310 million euros ($432 million) in charges related to power transmission projects. Alstom booked 220 million euros in restructuring costs, up from 137 million euros a year earlier.

GE and Siemens are circling Alstom to add turbines and other equipment for power plants and transmission networks amid rising demand in the oil and gas industries. While adding energy assets may bring Siemens Chief Executive Officer Joe Kaeser closer to his goal to boost profit long term, it might prove challenging to combine businesses that carry out big infrastructure works with political, financial and operational risks.

“Siemens has struggled for years with high costs for mismanaged infrastructure projects and an Alstom deal would make it even more difficult to get those costs down,” said Boris Boehm, who helps manage about 2.1 billion euros, including Siemens shares, at Aramea Asset Management. “Merging their energy assets would create many operational problems and be a very complicated and difficult task.”

Siemens Overhaul

Kaeser is overhauling Siemens’ 60 units that make everything from trains to medical scanners to expand the German company’s energy business. Siemens yesterday agreed to buy some Rolls-Royce Holdings Plc energy assets for $1.3 billion, while saying it will list its hearing-aid unit and manage its health-care business separately. Kaeser’s predecessor, Peter Loescher, was ousted after cutting profit targets five times in his six-year tenure amid costs for mismanaged projects.

Kaeser, who took over as CEO last year, has said Siemens will select projects more carefully. Siemens has posted charges totalling 808 million euros since 2011 relating to delays in linking offshore wind farms in the North Sea to the grid. Charges for delayed train deliveries have also trimmed hundreds of millions of euros from profit since 2011.

Siemens’s income from continuing operations before taxes was 1.61 billion euros in the fiscal second quarter, missing analysts estimate for 1.78 billion euros. Alstom’s income from operations fell 3 percent in the year ended in March as sales stagnated. Net income fell 28 percent to 556 million euros as restructuring costs, financial expenses, legal charges and unspecified write-off climbed. Analysts predicted 696 million euros.

Siemens shares rose 1.3 percent to 95.27 euros in Frankfurt today, while Alstom gained 0.8 percent to 28.95 euros in Paris.

Job Guarantees

Siemens and GE also face demands from the French government to guarantee jobs at Alstom, reducing the potential savings from a deal.

Siemens’s proposal will probably entail swapping some of its rail assets for Alstom’s energy division and creating two European leaders in the fields, people familiar with the matter have said. Siemens would become one of the world’s largest manufacturers of equipment for power plants and electric transmissions.

“There was some sort of one-sided offer which we heard about and conveyed our interest that it would be in the best interest of the shareholders to look at the asset,” Kaeser said in an interview today. “So far we’ve got what we wanted.”

The German company has asked Alstom to give it the same access to its books as GE before it makes a formal offer. Kaeser today said a joint deal with GE, under which both companies would buy different Alstom assets, would be too complex.

Board Shakeup

To add energy expertise, Royal Dutch Shell Plc executive Lisa Davis will join Siemens’s management board on Aug. 1 with responsibility for power operations. Michael Suess will step down immediately from a similar role “for personal reasons and by mutual consent.”

“We still have a lot to do to improve our operating performance,” Kaeser said today.

Alstom has conceded it lacks the critical mass to compete with GE, Siemens and emerging market players. It plans to use the proceeds to bolster its train and signaling division, pay down debt and reward shareholders.

Alstom’s order intake fell 10 percent last year to 21.5 billion euros as “a number of major infrastructure projects have been postponed, notably in thermal power,” the French company said today.

“My goal is that the process doesn’t carry on endlessly,” Alstom CEO Patrick Kron said on a call with reporters. “Alstom isn’t in a crisis, it doesn’t have short-term problems. It has strategic problems in energy that we want to address.”

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