By Ted Mann and Géraldine Amiel
General Electric Co. is in talks to buy Alstom SA's energy
business, people familiar with the matter said, a move that would
beef up GE's power-generation unit and tilt the conglomerate's
earnings more heavily toward industrial operations.
GE Chief Executive Jeff Immelt is under pressure to boost
earnings from areas such as jet engines, medical devices and power
plants to reduce the company's reliance on its finance arm. A deal
for the French engineering company's power-generation and
transmission-grid assets would do that at a stroke.
Alstom's energy operations generated about $14 billion between
April and December, 71% of the company's total revenue. The
operations would complement GE's power-and-water business, which
accounted for $24.7 billion of the U.S.-based company's $146
billion in revenue last year.
A deal likely would be one of GE's largest in a decade. It would
instantly give the company new power-turbine business in emerging
markets and Europe and provide an entree to the
transmission-equipment market, where GE lacks a strong
presence.
But GE would be absorbing the bulk of a company that has been
struggling against weakening emerging markets, slack economic
growth in Europe and cutbacks in capital spending by European
utilities.
A deal likely would cost GE much more than the $1 billion to $4
billion that the company has said it prefers for acquisitions. But
Mr. Immelt last week said he would be willing to pay more if he
could find good values.
Alstom said Thursday that it wasn't aware of a potential public
bid for its shares and that it continuously reviews its strategic
options.
A weak outlook had driven Alstom's shares to a nine-year low
earlier this year. Alstom's shares closed 11% higher in Paris on
Thursday. GE's shares rose four cents to close at $26.46 on the New
York Stock Exchange.
French newspaper Le Figaro reported Thursday that the companies
were in talks over the energy business.
A GE acquisition of Alstom's energy operations likely would face
antitrust scrutiny by the European Union and at national levels in
Europe. The companies compete head-on in many European markets over
energy turbines or renewable-energy production. Combining their
energy assets would create one of the largest players in the
European power-generation business.
"Even though GE and Alstom are, to a certain extent,
complementary to each other, there will be an overlap in a number
of markets," said Marco Slotboom, an antitrust lawyer with VVGB in
Brussels. "Competition authorities will therefore want to
scrutinize the deal and would like to know whether customers will
have sufficient choice of supply following the transaction."
A deal could also face hurdles with the French government.
President François Hollande has signaled his openness to foreign
investment as he seeks to revitalize his country's tepid economy.
But Alstom, known for its TGV superfast train, long has been
considered a strategic asset in France. A deal would leave the
company much smaller, focused on commuter trains and rail
infrastructure.
Also, Alstom last month said it was cooperating with the U.S.
Justice Department on an investigation into possible improper
conduct, though the company didn't provide details.
GE is the world's dominant maker of gas turbines. The company
commanded roughly 42% of the market in 2012, with Germany's Siemens
AG at 27%, according to a Citigroup analysis citing McCoy Power
Reports. Alstom was a distant fourth, at 4%.
But Alstom is second to Siemens among Western companies in the
market for coal-fueled turbines for power plants. That would give
GE a product to sell in markets that aren't ready to buy its
higher-price gas turbines.
Alstom generates about one-third of its sales in Western Europe,
which would give GE a bigger installed base of power equipment from
which it can reap service and repair business, according to
Bernstein Research.
Sales at Alstom's energy operation shrank in the first nine
months of its fiscal year, which ran through March, as orders fell
sharply in its grid and conventional-power businesses.
CEO Patrick Kron in November unveiled a plan to slash about $2
billion in costs, in part through job cuts, and has planned to
raise cash by selling a minority stake in its flagship train
business and other assets.
GE's interest might have been piqued by the difference between
the companies' operating margins: 6% for Alstom and 16% for GE's
industrial operations, said Deane Dray, an analyst with Citigroup.
Running Alstom's operations more efficiently could make the deal
pay off.
"It becomes a very interesting cost-takeout and rationalization
project, " he said. "That's one of the things GE's good at."
Buying the French company also would give GE a chance to deploy
some of its overseas cash, which as of Dec. 31 had swelled to $57
billion, more than half the company's total of $88.6 billion. GE
would owe U.S. income taxes on any overseas funds returned to the
country to pay dividends or buy back stock. U.S. companies can use
their overseas cash to buy foreign businesses without taking a tax
hit, making such transactions more appealing.
Kate Linebaugh in New York and Inti Landauro in Paris
contributed to this article.
Write to Ted Mann at ted.mann@wsj.com
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