Shrink to grow
Ending the days of Alstom as an unwieldy conglomerate would end many of its headaches. Given time, the group could probably take care of its problems on its own. Outside help would allow it to speed up the recovery. And General Electric could be a powerful catalyst for the transformation.
According to media reports, the French engineering group is considering hiving off its power divisions to GE. The unit making high speed trains could remain a standalone company. The idea makes sense, both from a financial and strategic viewpoint. The company is burdened by too much debt, a ropey credit rating and looming refinancing needs of some 750 million euros in 2014. Moreover, it is facing falling demand and more competition in power generation, which accounts for 45 percent of revenue and 65 percent of operating profit.
The weak balance sheet hampers Alstom’s ability to offer customers attractive financing conditions – a key competitive disadvantage relative to better-financed rivals, as Berenberg analysts point out. It also limits the group’s R&D firepower.
Analysts see Alstom’s net debt at an average 3.5 billion euros or two times EBITDA, Thomson Reuters data shows. Negative cashflow for the year stands above half a billion.
Alstom had already started to address its problems. It aims to shrink costs by 8 percent annually by 2016, with an asset disposal plan worth up to 2 billion euros. After flogging its heat exchanger unit for 730 million euros, the next step is to sell or list a minority stake in the train unit. That could generate another billion.
Delivering on these plans could be enough to avoid a junk rating. But the process may take more time than its shareholders – first of which Bouygues, the French construction group, with a 29 percent stake – are willing to allow.
Selling power generation and distribution – together more than 70 percent of its overall revenue – to GE would be a quicker fix. There are few synergies between power plants and TGVs. In fact, independent, focused train makers like Switzerland’s Stadler Rail tend to be more successful than their competitors trapped in conglomerates. In power generation, Alstom’s gas turbines business is too small to succeed. But its transmission solutions and hydro technologies would complement GE’s portfolio nicely.
If the French government, for political reasons, opposes any combination with GE, Alstom could conceivably survive as a limping French conglomerate. But a split and sale would make its different parts stronger.