By Ted Mann and Géraldine Amiel
General Electric Co. is in talks to buy the energy operations of
Alstom SA, people familiar with the matter said, a move that would
leave the struggling French engineering concern a much smaller
company, focused on commuter trains and rail infrastructure.
GE Chief Executive Jeff Immelt is under pressure to boost
earnings from the conglomerate's industrial operations, and a deal
for Alstom's power generation and transmission grid assets would do
that at a stroke.
The French company's energy operations generated about $14
billion between April and December, 71% of the company's total
revenue. The operations would complement the offerings of GE's
power and water business, which accounted for $24.7 billion of the
company's $146 billion in revenue last year.
A deal would likely be one of GE's largest in a decade and would
instantly give the company new power-turbine business in emerging
markets and Europe, as well as an entry point for transmission
equipment, where GE lacks a strong presence.
But GE would be absorbing a company that has been struggling
amid weakening emerging markets, slack economic growth in Europe
and cutbacks in capital spending by European utilities.
French newspaper Le Figaro reported Thursday that companies were
in talks over the energy business, after Bloomberg news service
reported Wednesday that GE was in talks to buy the entire French
company.
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 were up slightly in late-afternoon trading on
the New York Stock Exchange.
A GE acquisition of Alstom's energy operations would likely face
antitrust scrutiny by the European Union and at national levels in
Europe as the companies compete directly in many European markets
for energy turbines or renewable-energy production.
Alstom has been in intense competition with Germany's Siemens
AG--and to a lesser extent GE--for a share of the European
renewable-energy market, which has been buoyed by substantial
governmental subsidies. Combining Alstom's and GE's energy assets
would make the new operation one of the largest players in Europe's
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."
The French government could pose another obstacle. 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, has long been considered a
strategic asset in France. Ten years ago, the government bailed out
the company and sold several units, including its turbine
operations to Siemens.
GE is the world's dominant maker of gas turbines. The U.S.-based
company commanded roughly 42% of the market in 2012, with Siemens
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 power-plant turbines. That would give GE a
product to sell in markets that aren't ready to buy its higher
priced 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, analysts from
Bernstein Research said.
Sales at Alstom's energy businesses 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.
Buying the French company 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 $88.6 billion in total cash.
GE would owe U.S. income taxes on those funds if it returned them
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.
Alstom last month said it was cooperating with the U.S. Justice
Department on an investigation into possible improper conduct,
though didn't provide details.
Kate Linebaugh and Inti Landauro contributed to this
article.
Write to Ted Mann at ted.mann@wsj.com and Géraldine Amiel at
geraldine.amiel@wsj.com
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