NEWS

EU to Approve GE’s $17 Billion Alstom Deal

Tuesday, Sep 08, 2015

The European Union is set to approve General Electric Co. ’s $17 billion acquisition of Alstom SA ’s power business on Tuesday, two people familiar with the matter said, putting the U.S. industrial giant a step closer to clinching its biggest ever deal.

The EU’s green light will put an end to nearly eight months of wrangling with the U.S. company, which has sought to convince regulators that the deal won’t lead to higher prices for gas turbines in Europe.

The purchase by an American company of a crown jewel of French industry was politically charged from the start. Germany’s Siemens AG was pulled into the contest early on by French officials seeking a European buyer for Alstom. But Paris subsequently changed tack and lobbied Brussels to approve the deal, said a person familiar with the matter.

GE eventually offered concessions to Brussels that satisfied the regulators’ concerns. The EU’s executive arm is expected to formally approve the deal at a meeting in Strasbourg, France, on Tuesday, the people said.

The final major hurdle to the merger—approval from U.S. antitrust authorities—is also likely to be cleared as early as Tuesday, one of the people said.

It wasn’t immediately clear what conditions would be applied. GE Chief Executive Jeff Immelt said in May he was willing to sell off intellectual property to secure regulatory approval, but concessions around the French company’s service business weren’t an option.

The Alstom deal is central to Mr. Immelt’s multiyear effort to reposition GE, returning focus to its industrial business units as it exits the lending business. After the Alstom acquisition and the sell-off of GE Capital is complete, GE says it will generate 90% of its profits from industrial business and just 10% from financial services. As recently as the financial crisis, lending generated as much as half of GE’s annual earnings.

The deadline for the EU’s investigation has been extended several times, and by more than two months, as GE sought to convince regulators that their initial concerns were misplaced.

The repeated delays stirred up memories of an earlier proposed GE deal that foundered at the hands of regulators in Brussels—its failed $45 billion takeover of Honeywell Inc., which the EU blocked in 2001 after U.S. regulators had given the go-ahead.

When it came to the Alstom deal, the U.S. company pushed back strongly against Brussels’ concerns. GE argued that heavy-duty gas turbines are sold in a global market by four competing companies, including Siemens and Mitsubishi Hitachi Power Systems, and that only 5% of demand is in Europe.

But the EU said only two strong competitors would remain after the merger.

In June, the EU sent GE a formal list of concerns relating to the proposed deal. Only then did GE relent, saying in July that it had proposed concessions that preserved “the economic and strategic value of the deal.”

The U.S. company has complained repeatedly about the length of the investigation, which it said was hurting Alstom by causing uncertainty for employees and customers. Experts said GE could have come forward sooner with an offer to sell parts of the business in order to allay the regulators’ concerns.

The Alstom deal proved difficult and costly to complete for GE. Over the nearly 18 months in which the American company sought approval from various European regulators, GE has repeatedly reassured investors that the rationale for the purchase is secure. The company says the installed base of steam turbines it will receive from Alstom will boost its footprint in emerging markets even as GE wrings out cost savings by consolidating Alstom’s industrial footprint and its own.

GE is focusing on its heavy industrial roots, like its businesses making jet engines, locomotives, power turbines and medical scanners. Mr. Immelt is also trying to sell GE’s appliance business, as the company looks to shed lower-margin, slow-growing pieces of the company.

Still, Wall Street has remained cool to the deal, with many analysts who cover GE saying their clients remain indifferent at best.

People familiar with the company’s thinking say that Mr. Immelt has long felt GE held a crucial trump card as regulators sought deeper concessions. Without a buyer like GE, Alstom was poised to fall into even more dire financial straits. Finding a way to secure the sale to GE will also mean that job guarantees for French employees of Alstom, and a pledge by GE to add jobs in the country, will remain in force.

For Mr. Immelt, one piece of his “pivot” is preserved by the EU decision. What remains, once the deal is closed, is the work of integrating Alstom into GE, a project Mr. Immelt told investors early this year would be the most important facing the company this year, and in the coming years, too. Meanwhile, the company continues to sell off units of GE Capital, aiming to part with the bulk of what was until recently a $500 billion banking business by the end of next year.

 

wsj.com

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