GE can make good case for Alstom merger approval
30 January 2015. By Dafydd Nelson.
General Electric is best remembered in EU antitrust circles for failing to salvage its buyout of Honeywell International. But that misadventure belies GE’s more recent regulatory successes in Europe, which could bode well for its acquisition of Alstom’s energy business.
The US conglomerate has secured straightforward regulatory approvals over the last two years for buyouts involving a life-science company, an oil machinery maker and wind farms in France.
And with its acquisition of Avio’s aviation business in 2013, GE revisited the same business — aircraft components and engines — that scotched its $42 billion bid for Honeywell in 2001.
GE won a bidding war for Alstom last June, when the French company’s board unanimously recommended the offer and the French government backed the deal.
That set the stage for GE’s most challenging antitrust task in more than a decade: winning European Commission merger approval for the deal, which values Alstom’s energy business at 12.35 billion euros ($14 billion).
The two companies are giants in Europe’s energy industry, building the heavy-duty turbines that drive power stations. Given their combined clout in the market, the companies can expect commission case handlers to reach for a fine-tooth comb.
Fairfield, Connecticut-based GE filed the transaction for EU merger approval last week. The Brussels based regulator currently has until Feb. 23 to complete an initial assessment of the deal.
One obstacle GE might face to getting EU clearance could be overcoming concerns that a merger would combine two of Europe’s leading suppliers of large industrial gas turbines, which are used by power companies to generate electricity.
Yet GE can point to several factors in its favor as it attempts to convince commission officials that the buyout of Paris-based Alstom’s energy arm won’t result in higher prices for customers.
Several large competitors in the supply of large industrial gas turbines would remain following the deal, GE can argue. Foremost among those rivals is German engineering giant Siemens, which was also interested in acquiring Alstom.
The commission is likely to assess whether Siemens is a closer competitor to GE than Alstom is. If so, the German company would be strong enough to keep competing for the same turbine sales.
The regulator will also have to weigh the competitiveness of other power-engineering rivals, including Ansaldo Energia of Italy and Japan’s Mitsubishi Heavy Industries, though the latter is arguably a lesser competitor in Europe.
Last year, China’s Shanghai Electric Group bought a 40 percent stake in Ansaldo for 400 million euros.
GE can argue that the move — with the financial muscle it brings — has boosted Ansaldo’s ability to compete in Europe.
A further weapon in the US conglomerate’s armory could be Alstom’s need to do a deal in the first place. Commenting on Alstom’s financial results last May, Chief Executive Patrick Kron defended a sale of the power assets to GE by saying Alstom faced “strategic challenges.”
“My concern and my objective are to ensure a future for each of Alstom’s activities and its employees,” he said.
Earlier in the interview, Kron had noted that the global market for thermal power plants had “fallen from 260 gigawatts in 2008 to less than 150 gigawatts in 2013.”
EU merger rules allow case handlers to take a company’s faltering activities into account when they assess the impact of a merger. If the target would lose competitiveness as a standalone entity, then its weakened position would be relevant for the review. But that argument doesn’t hold water if every company in the market has suffered equally.
Although GE and Alstom’s production of large industrial gas turbines might be the most daunting issue the companies face, it won’t be the only one. For example, the two companies also make complete systems for gas-and-steam power plants, known as “turnkey solutions.” But as with gas turbines, Siemens might be regarded as a closer and stronger rival to GE than Alstom is.
Another issue that could get some attention is that the merger would bring the US company an enormous base of customers that already have GE and Alstom turbines. That could give GE an advantage in future sales to those customers.
GE can be expected to point out that contacts for power-plant hardware are awarded through a bidding process, meaning existing relationships aren’t relevant. But the installed base could still give GE an advantage in servicing those turbines.
Under the terms of the GE-Alstom deal, the companies would create a 50-50 joint venture to combine their grid assets. In renewable energy, each company would own half of Alstom’s offshore wind and hydroelectric businesses. Alstom and GE would also create a 50-50 nuclear alliance, which would include Alstom’s production and servicing of equipment for atomic power plants.
The commission’s internal reference number for the review if M.7278.