GE Clears Major Hurdle in Transformation
Alstom deal adds exposure to high-growth emerging markets.
General Electric (GE) has received favorable reviews from both the European Commission and the U.S. Department of Justice, allowing the Alstom deal to close contingent upon concessions offered by GE earlier this summer. To assuage the EC's earlier antitrust concerns, GE agreed to sell a portion of Alstom's heavy-duty gas turbine portfolio to Italian firm Ansaldo Energia, a provider of combined-cycle power plant equipment. While this shrinks the size of the portfolio GE will ultimately acquire, we believe the decision preserves the most attractive parts of the deal. In securing the retention of Alstom's steam turbine portfolio, GE gains additional exposure in high-growth emerging markets where such equipment is favored. Furthermore, we believe GE has a sizable opportunity to expand its lucrative aftermarket business by offering additional services and solutions to Alstom's existing installed base.
The culmination of the Alstom deal is a significant milestone in wide-moat GE's ongoing portfolio transformation. The transaction is still expected to close in the fourth quarter at a final purchase price of about $9.5 billion after accounting for various price adjustments and divestiture proceeds. With GE finally past a lengthy approval process, work on achieving nearly $3 billion in expected Year 5 synergies can commence in earnest. Management has maintained earnings accretion targets of $0.05-$0.08 per share in 2016 and $0.15-$0.20 per share by 2018. Initially, we expect that low-hanging fruit in manufacturing optimization and back-office integration will fuel the near-term synergy achievements; however, we maintain that the Alstom integration is likely to prove to be complex, requiring significant management attention over the next five years at a minimum. Nevertheless, our long-term thesis for Best Idea GE continues to play out, and we reiterate our $30 fair value estimate.
Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.