French Minister warns EC not to hold up GE acquisition of Alstom

Previous posts on the GE acquisition of Alstom are here.


The GE 9HA gas turbine (nicknamed Harriet after a Galapagos giant tortoise) is being built at their Belfort factory and is surely a giant. At 400 MW it will be the largest gas turbine ever built and will give a combined cycle of, nominally, 600 MW output from a single GT/ST block. This will be the first “H” class Frame 9 machine (Frame 9 is for 50Hz and Frame 7 is for 60 Hz) and it is reported that just scaling up the 7HA engine to the 9HA has cost GE about $1 billion in R & D.  Two such 9HA GT’s with a single steam turbine in a 2+1 configuration would give a 1000 MW power block. The 9HA weighs in at about 400 tonnes. Strong, powerful stuff.

GE 9HA

The GE 9HA turbine, aka Harriet. (GE)

This is the same facility which was part of Alstom while Alstom was a GE licencee and before it was separated from the rest of the site when Alstom acquired ABB’s power generation business. This particular engine is for a gas turbine combined cycle plant for EdeF’s Bouchain North plant. Alstom still has a large part of the Belfort site but Alstom’s power part of the site will go to GE if the acquisition of Alstom’s power and grid businesses now gets approval for the EC. The portion of the site dedicated to transport will remain with Alstom. The steam turbine business at Belfort for nuclear turbines will be in a GE/Alstom JV (project name Arabelle) but I expect that Alstom will (must) exit in due course, though the French government will not allow the nuclear power part to be entirely out of their control. If the deal goes through the French government will have 20% of what is left of Alstom (mainly transport plus their share of the 2 JV’s with GE) and Bouygues will have their (albeit partial) exit.

Most other countries have already approved the acquisition including India, South Africa and Brazil. It has not been much of an issue in the US where Alstom’s business is small compared to GE’s. The long draw-out EC process sticks out.

Yesterday the French Economy Minister, Emmanuel Macron, visited Belfort and his highly publicised visit to both the GE and the Alstom parts of the site was a very visible “blessing” from the French government for the deal. He took the opportunity to warn the EC and Margrethe Vestager, the European commissioner for competition, not to hinder the deal since this would only help the Chinese competitors. I note that Patrick Kron, Alstom’s CEO, was conspicuous by his absence. His €4 million termination deal with Alstom (once the GE deal goes through) has been heavily criticised by the French socialist government. Mind you these same leftists had also talked about “treachery” when the deal was first announced. The French press has also criticised Vestager for being too finicky. Needless to say the EC is not amused.

PoliticoEmmanuel Macron warned that blocking the deal would only bolster Chinese rivals and cost jobs in Belfort, where GE and Alstom are the largest private employers. He has met with Margrethe Vestager, the European commissioner for competition, on two occasions in recent months.

The Commission put the brakes on the deal in late February, announcing an in-depth investigation into the combined market power of the two companies. The Commission said it was concerned about preserving competition in Europe for heavy-duty gas turbines. As the clocked ticked down in May to the Commission’s deadline for GE to submit more information and data, GE’s Chief Executive Jeff Immelt signaled he was ready to bargain, potentially selling some of the intellectual property.

The Commission reset the clock and must now decide by August 21.

Macron assured factory workers and told local newspaper L’Est Républicain, “We think that competition policy is important and we support the Commission’s role in this domain. But we ask it to really look at the right market: that market is global, and the competitors are Chinese. And it is above all them that would benefit from the Commission blocking the rapprochement between GE and Alstom!”

Macron’s intervention is unlikely to please European Commission officials. Seldom do national governments take a public stance on mergers being reviewed by the EU competition authority, which does not take into account a deal’s effect on employment. …… Immelt has drawn a red line around Alstom’s business that services gas turbines. That lucrative segment underpins the economic rationale.

As I have posted earlier, GE will walk away from the deal if the EC demands conditions which impairs the service revenue from Alstom’s existing gas turbine fleet. From my experience it is this revenue which probably enables the deal and impairment here could be fatal.

The EC will need to be very precise in demanding concessions from GE while ensuring that the deal does go through. Divesting parts of the HDGT business to unknown (and probably non-existent) buyers is probably a lose-lose solution. I expect that GE’s walk-away point will be reached if earnings from the service of Alstom’s fleet of gas turbines is removed from the mix. In fact any conditions set by the EC which dilute future revenues could prove fatal for the deal going through. Assurances about keeping R & D located in Europe and assurances about jobs and even about R & D budgets could be absorbed by a robust business plan. But no business plan can survive if something as fundamental as the revenue stream is adversely affected. And it is the volume of that revenue stream – and not just the margin from those revenues – which is crucial.

Macron does have a point though. If EC conditions are so onerous that GE walks away from the deal, Alstom will most likely have to find another (or several) buyers who will not pay anything like as much as GE have offered. If the EC insists that GE must sell Alstom’s sequential combustion business or the technology, any buyer would need to have a high enough technological base and very deep pockets – and that may be an impossible ask. Alstom clearly has no heart left to continue the business by itself. And then Shanghai Electric (leveraging its 40% ownership of Ansaldo) has some interesting possibilities of becoming one of the Big 4 in the gas turbine world (the others being GE, Siemens and Mitsubishi).

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