General Electric (GE, Financial) recently lifted its expectations of synergies from the integration of Alstom (ALSMY, Financial). The industrial conglomerate estimates to save $3 billion annually, up from its earlier expectation of $1.2 billion. It also reaffirmed that the combination would lead to an earnings accretion to the tune of $0.06-0.09 a share next year, and increase to $0.15-0.2 accretion by 2018. General Electric is presently awaiting the European regulators to give the Alstom deal a go-ahead.
General Electric chief, Jeff Immelt, desires to speed up the process of disposing the company’s massive finance asset as targeted benefits from the acquisition of Alstom’s energy business has more than doubled. In April, the company had declared its plans to sell $200 billion worth of its financial arm, GE Capital, by 2017. But at the Electrical Products Group Investor Conference held on Wednesday, Immelt said the company now aims to mostly be done with the process by next year end. Here’s an update on the company’s plan.
Disposing the capital assets to focus on industrial
During the conference Immelt told that General Electric is considering selling its intellectual property to get the deal through. However, the company has no intentions of doing anything that could upset its service revenue stream as they generally carry high profit margins.
General Electric has already disposed majority of GE Capital financial sub-segments such as Real Estate, Consumer, and Commercial Lending segment. Here on, the company is looking to further spin off its financial segment with assets valued between $20 billion to $30 billion by the middle of this year. This would help General Electric to sell around $100 billion of the financial segment assets this year, up from its previous target of $90 billion. Immelt said, "I'd be disappointed if we don't beat these numbers…I think we have the potential to do very well on this transaction." The leftover assets, valued about $100 billion, shall be sold in 2016.
The company’s key strategy is to focus toward the industrial business. And this is where Alstom comes into play. Alstom’s energy assets would bolster the company’s industrial base. As earlier mentioned by Immelt that the company’s long-term goal is lessen dependence on the financial segment and lower its revenue contribution to 25% by the end of 2018.
The company’s pullback from the finance arm shall leave it predominantly as a manufacturer of the big-ticket industrial offerings including aircraft engines, power and locomotives equipment. However, its long awaited Alstom's power equipment business deal is still under the scanner of the regulatory body. The deal, as such, is still awaiting approval a year after it was officially announced.
What’s going on?
Immelt had a meeting with the European regulators this month in view of pursuing a green signal for the deal. The company is not going to make further concessions with the European authorities says the CEO, though earlier during the month the company had a mind to look into giving more concessions if required.
General Electric had announced the Alstom acquisition proposal last year to get access to the French multinational giant’s energy assets for a deal price of $17 billion. This is part of the company’s efforts to widen its industrial base in the international market, the European region in particular. However, the European authorities look quite concerned regarding the impact of the acquisition, fearing that it would give a foreign brand too much market share and control to manipulate prices in the gas turbine market. The authorities have now postponed the tentative investigation timeline from June to August this year.
General Electric has worked to alleviate such fears stating that prices are determined by demand, and it’s got little to do with market share. The company has no intentions to increase prices in the region. The delay in approval is negatively impacting both General Electric and Alstom. However, the approval is just a matter of time. Once the combination is ratified, General Electric shall benefit immensely from the transaction in the long term.
