The French multinational giant Alstom SA (ALSMY, Financial) held an Extraordinary Shareholders’ Meeting on December 19 to vote for selling off its energy assets to global conglomerate General Electric (GE, Financial). Shareholders voted at the meeting and the transaction was approved by majority, precisely 99.2%. The acquisition of Alstom’s energy business is part of General Electric’s strategy to expand internationally and strengthen its industrial segment as the company looks to reduce its reliance on its GE Capital segment. Here’s the latest update on the deal and why GE should be a must in your portfolio.
The deal in details
At the shareholders’ meeting, the chairman and CEO of the French engineering conglomerate Patrick Kron spoke of the progress of the deal. As part of the deal between the two giants, General Electric will purchase a substantial portion of Alstom’s power equipment business, which makes for 70% of the latter’s revenue. GE has made arrangements to set up three joint ventures in electricity grid, nuclear power, and renewable energy. Alstom will retain its transportation business, and besides, would also get General Electric’s rail signaling business as part of the deal. Bloomberg reports that the equity value of the deal comes in at $15.1 billion.
General Electric and Alstom have come to terms after great amount of difficulty as the former was facing a competing bid from Siemens and Mitsubishi Heavy Industries. The French government’s support also came in only after the American behemoth revised the terms of the deal. According to the revised proposal GE wouldn’t completely buy Alstom’s power and grid unit, but would instead purchase the steam turbine business and function through joint ventures.
Why Alstom is important?
Though the revised deal might not be as appealing as the original, however, it’s still quite lucrative for General Electric. The biggest win for the company is Alstom’s gas turbine unit. This will support the company to solidify its own power business, which is an integral part of its industrial segment. This is essential for General Electric from the view point of sustaining its position as the global market continues to scale up power generation at a robust pace.
According to General Electric, the global power generation capacity would be increased by 3,400 GW in the next decade. And if the company wants to sustain its dominant position, it has to ramp up activities to have a greater market share. Moreover, more than half the power generation would come from gas and steam turbine. This is where Alstom’s acquisition counts the most to General Electric. The synergies of combination are going to help the company earn long term rewards in the form of greater market share, higher revenue, and robust cash generation.
GE can sparkle your portfolio
Falling oil prices have raised concerns regarding the company’s oil and gas division in the industrial segment. GE expects this segment to remain flat or fall a maximum of 5% in 2015. However, this is not reason enough for investors to worry or withdraw from the stock. The energy management, aviation, power and water divisions are going to drive the company’s growth in the coming year. The strength in these segments should have a greater positive impact on the company’s financials, and thus compensate for the weakness in the oil and gas segment.
Besides, the company’s strength can be gauged in various areas including the growth in top and bottom lines, improving net income, strong cash generation from operating activities and healthy valuation. The American conglomerate’s revenue gain of 1.8% surpassed the industry average of 1.3%. This growth was also reflected in General Electric’s bottom line. Earnings per share rose 6.3% in the last quarter over a year earlier. Despite challenges, the company has reported earnings growth in the past couple of years. Analysts expect earnings per share to come in around $1.67 versus $1.47 in the last year. The company’s net income grew 10.8% to $3.5 billion in the last quarter. The cash flow from operations also stood strong and increase 15.4% to a little over $6 billion.
Moreover, its deal with Alstom, which is scheduled to conclude in the second quarter of 2015, is expected to benefit the company in a great way. General Electric holds the top position in the business of gas turbine, but steam turbine is something that it doesn’t have. Alstom’s acquisition would help the company to build its space in steam turbine as well, and cement its dominance in the future. All these things show that General Electric is on its growth trajectory and should be a stock worth considering in an investor’s portfolio.
