Archive for the ‘Business’ Category

Iran deal is done, Bibi unhappy, Greek deal done, Greeks unhappy.

July 14, 2015

Reuters and other anonymous sources are reporting that an Iran deal has been done.

Greece yesterday, Iran today, what’s for tomorrow?

Bibi is neither pleased nor amused. A “pre-emptive” strike by Israel on Iran now becomes that much more difficult. Saudi Arabia will not be too pleased either. If sanctions are  lifted and also on weapons sales by Iran then we can see the pro-Iranian factions across the Middle East getting a boost. Which will probably constrain the advance of ISIS somewhat (and whatever the Saudis might say it is private Saudi money funding the barbarians). The pro-Iranian factions in Syria and Iraq will not only get a boost, they may also be more successful on the ground than the US-led coalition.

However Saudi Arabia will not be too unhappy about the additional downward pressure on oil prices. It will be sometime before Iran can ramp up production and during this time, low-cost Saudi oil will win further market share. Though Saudi Arabia failed to wipe out shale oil from the US, it is still increasing production and contributing further to the current oil glut. Saudi seems to be pursuing a revised strategy of keeping oil prices relatively low for 2 years or more in a war of attrition against the higher-cost oil producers. Market share is perceived as their prime weapon to try and get rid of the higher-cost producers. But I think they have miscalculated even here. A discontinued shale oil well can be restarted with very little investment and at very short notice. Production costs of shale oil have decreased sharply. Shale oil developers will just ramp their production up and down depending upon the prevailing oil price. And the larger shale oil wells can make money even with oil prices down at $40/ barrel.

It isn’t quite time for vacation yet in Europe (apart from Sweden which is closed for July). Some kind of framework resolution for the whole package of the 3rd bailout needs to be passed by the Greek parliament by tomorrow. Some resistance is showing today but the resolution will surely pass. Of course that says nothing about the Greek government’s implementation of all they have signed up for. Their track record of implementing what has been solemnly promised is not good. And if the reports today that the ECB will not be pumping liquidity willy-nilly into the Greek banks are correct, then the banking system will have to start issuing IOU’s to keep functioning while the negotiations are concluded. That will effectively be an alternative currency and it won’t be long before the IOU’s start trading at a different value to par. A currency by another name than “Euro” is still a Grexit for as long as that currency is used.

But an Iran back in the international fold is undoubtedly a good thing.

Chinese crash gives new investing opportunity

July 9, 2015

The 2015 Chinese stock market crash has different drivers but resembles the 2007/2008 crash in investor behaviour.

Many domestic Chinese investors made a great deal of money with the recovery in late 2008/ early 2009. My guesstimate is that any real recovery from the current crash cannot come until the 6 month freeze just introduced on large stockholders selling shares is withdrawn. But since investing in the Chinese market is now possible through a variety of funds, there is an opportunity coming. My estimate is that the bottom is when the Shanghai Composite Index is driven down to about 3,100 at which point the market will be grossly undervalued. The opportunity will come in the subsequent “bull” market when stocks will be driven up into “overvalued” territory again.

I am a strong believer in “track record” and that past behavioural patterns repeat or, at least, change very slowly.

My investments are far too small to be of any significance in the big picture. My strategies are therefore all based on detecting and riding the waves of behaviour exhibited by others. And so I will be looking to making some investments in about 4 – 6 months with a target of 30-40% growth over the following 6 months.

China investing opportunity

China investing opportunity


GE makes its pitch for Alstom acquisition to the EC this week

July 1, 2015

The European Commission must make its decision by early August regarding GE’s proposed acquisition of Alstom’s energy and grid business. The EC’s concerns have held this deal up for the best part of a year. I estimate that financial closure for this deal is now no longer possible at least till the end of 2015. The EC sent GE its “statement of objections” in the middle of June. This week (tomorrow) GE will be attending “hearings” at the EC at its own request. The hearings are to be “oral” and the meetings are “closed-door”.

It seems to me that this is more of a negotiation rather than a “formal” hearing. Clearly GE will be exploring how far it needs to go in its final, written submissions which will be needed before the EC can make any formal adjudication in August. I suspect that GE might be considering “creative” alternatives for making IP from Alstom, which it judges it does not – and will not – need, available to other “serious” players. One difficulty is that a lot of IP has value in creating a barrier for others, rather than being usable in its own right. I also suspect that GE is looking to ensure that the revenue stream from the service of Alstom’s fleet of operating gas turbines is not impaired by being forced to give up part of that business. And to do that GE may be considering ways and means of assuring the EC that the pricing of such service business will be “reasonable” and not predatory.

Personally I think that many of the EC’s fears are imaginary or theoretical. They are quite insignificant compared to some of the predatory pricing and price-fixing that is evident in other industries. But then my own opinion is that it is better not to have a competitor in the market place rather than for a “sick” or reluctant competitor to be forced to continue. That only encourages distortion of the market place to the ultimate detriment of OEM’s and customers and eventually consumers. Moreover, R & D for advanced gas turbine technology will, I think, be served best by the deal going through.

According to Reuters, General Electric, the EC, other EU agencies, and parties opposing the deal will take part in a closed door hearing this Thursday, July 2.

Reuters:

Senior officials from the EU competition authority, their counterparts from EU agencies and rivals are expected to attend the closed-door hearing.

“We have requested an oral hearing,” GE spokesman Jim Healy said. He said the hearing would be on July 2.

French Economy Minister Emmanuel Macron has said the deal should be viewed in a global perspective and take into account Chinese rivals following the EU regulator’s decision to exclude the Chinese market from its scrutiny of GE’s market power.

The Commission is concerned the takeover would leave just two gas turbine companies in Europe, with GE competing only with Germany’s Siemens.

The EC has not announced who the objectors are but I expect that Ansaldo Energia (40% owned by Shanghai Electric) and Siemens are among those opposing. I can well see that Ansaldo/Shanghai would be looking to be able to access some of Alstom’s IP to help them to bridge the not inconsiderable technology gap they must overcome to even have a chance of becoming a major player in the Heavy Duty Gas Turbine market. Siemens, I am sure, would object as a matter of principle even if they will actually benefit from the deal. I am not sure if Mitsubishi-Hitachi has a presence large enough to have any locus standi as an objector in Europe. The Siemens/Wood Group JV (Turbo Care) which focuses on the service of non-Siemens gas turbines is likely to be a principle objector but in this case it is essentially a “pirate” and, hopefully, will not be given too much credence.

Patrick Kron, CEO of Alstom is very bullish – but then, of course, he can hardly be anything else.

Bidnessetc: Alstom SA chief executive Patrick Kron remains bullish that General Electric Company will successfully acquire its energy unit and will also have the European Union (EU) regulatory authorities’ approval. Mr. Kron’s statement came as General Electric has requested the EU antitrust authorities to conduct a hearing with the aim to get their approval.

The EU has been holding back General Electric’s request to acquire Alstom’s energy unit for the last few months, as it is investigating the effects of the acquisition on the European market. However, Mr. Kron said in an interview to a newspaper yesterday: “I hope that we are now in the final leg and I am confident … My position is very clear. I do not see why Plan A would not work out.”

European Commission’s objections to GE/Alstom deal may come today

June 12, 2015

My previous posts about the GE/Alstom deal are here:


UPDATE2! The EC has apparently sent its statement of objections to GE:

WSJ: The European Commission, the EU’s top antitrust regulator, said it had sent a so-called statement of objections to the U.S. industrial company on Friday.

UPDATE! Reuters reports that Alstom has reacted to the press articles today and said that they will continue to provide evidence to the EC about the positive aspects of the deal for Europe. About the “statement of objections” they said “There have been press comments that a ‘statement of objections’ would be issued by the European Commission associated with the investigation of the sale of Alstom’s Energy businesses to General Electric. This is a usual step in a phase II merger case and it does not prejudge the outcome of the investigation. It will allow both General Electric and Alstom to address specific matters pointed out by the investigating team.”


The EC are playing hardball and seem to be looking for substantial concessions from GE before approving GE’s acquisition of Alstom’s power and grid businesses. According to Reuters a statement of their objections could come today (12th June).

ReutersGeneral Electric Co may need to offer bigger concessions to win European Union approval for its purchase of Alstom SA’s power unit as regulators plan to warn the U.S. company that the deal would harm competition, two people familiar with the matter said on Thursday.

….. “A statement of objections could come on Friday,” one source said.

Such a document shows why the EU regulator views the deal as anti-competitive and is a prelude to a veto unless companies come up with strong arguments or significant concessions.

Alstom shares fell 3.2 percent following the Reuters story, while GE was down 0.3 percent. An EC spokesman declined to comment. Alstom had no immediate comment. GE said it was working constructively with the regulator.  “We are focused on a positive outcome that preserves the deal economics,” GE said, adding it was confident of closing the transaction in the second half of 2015.

As I have written before, I expect that the EC objections are centred around what will happen with Alstom’s Heavy Duty Gas Turbine (HDGT) technology and service business. GE has no immediate need for Alstom’s sequential combustion technology, though, in the long run, GE may be the best placed to utilise that technology to take gas turbines to new heights. Regarding the service business for gas turbines it is very rarely, and only for older machines, that a party other than the OEM can provide the most critical spares. So such spares for the Alstom machines would come in the future from GE instead of Alstom but it would be no real change to the competitive position. (For the critical, “noble” parts of any not-too-old gas turbine, the OEM has a virtual monopoly).

However what the EC may be struggling with is that

  1. insisting on Alstom selling the HDGT business to someone other than GE will not find any competent buyers and certainly not any price close to what GE would pay, or
  2. asking GE (or Alstom) to sell sequential combustion technology to a 3rd party could only find buyers a long way down the learning curve who would need deep pockets and maybe 5 years to bring themselves up to any kind  of competitive position, or
  3. asking GE to either commit to use the sequential combustion technology themselves but where GE would probably want to discontinue the Alstom machines quickly, or
  4. to make the technology  “generally available” (as some kind of open source technology) for other potential competitors which would also require that GE give up the service business for some of Alstom’s biggest engines (say the machines operating in Europe) so that they could be available as a “training ground” for any technology user trying to make a go of it (for example; Ansaldo/Shanghai, MHPS, Harbin, Bhel, Kawasaki Heavy ……)

None of these options would be easy to implement. Option 1, I think, will not fly. Option 4 is probably beyond GE’s walk-away point since the heart of their business plan – the service revenues – would be impaired. Some variation of Options 2 and or 3 and parts of 4 maybe will not chase GE away.

The EC is due to announce its decision by early August, and since the EC is in regular discussions with GE, it does look like there is a negotiation ongoing (even if it cannot ever be acknowledged to be a negotiation by either party). I suspect Alstom has no great part to play in this negotiation. The French government probably can not be seen to be involved, but they are certainly not happy with the EC and its objections. (Of course, it is inconceivable for the French government that the EC could possibly go against “French interests”).

The statement of the EC’s objections – if it comes out today – should give a good indication whether this deal is going to go through or will eventually die. But killing the deal is not really in Europe’s interests, so the EC will have to tread very carefully.

Clinton Foundation got millions from Swedish firms to avoid being blacklisted for Iran involvement

June 3, 2015

That the Clinton Foundation functioned as a channel for lobbyists to get access to Hilary Clinton is an open secret. But I certainly had not expected that there were such large money flows from Sweden and Swedish firms to the Clinton Foundation which apparently allowed them to carry on business in Iran without being blacklisted. Some payments were even made directly to Bill Clinton. It seems almost as if the Clinton Foundation may have specifically targeted firms and countries susceptible to US actions as sources for lobbying money.

So far I don’t see this being covered by the Swedish media but the Washington Times has a very long article. There is a clear Wikileaks connection since much of this information is obtained from diplomatic cables revealed by Wikileaks.


Update: Swedish Radio is now carrying the story but just quoting the Washington Times article. The radio report points out that they have not been able to check the story and imply that it is not reliable since it is from a right wing paper which is opposed to Hilary Clinton. But I note also that Swedish radio is generally very biased in favour of the Democrats in the US (and the Social Democrats/Greens at home).


The Wikileaks connection is interesting. I cannot help thinking that there must be a hidden back story as to why Assange has been hunted and prosecuted by the Swedish authorities for a quite ridiculous molestation/rape allegation. The allegations are by two women who shared a bed with him – quite willingly by their own accounts. The prosecutors first declined to take the matter further and there is surely also a hidden back story as to why the whole prosecution was restarted. Maybe this story is one of the reasons. But why does the Swedish prosecution based on what seems to be rather flimsy “statements” continue? What other Swedish – US connections are there that the Swedish government did not or does not want revealed?

Washington Times:

Bill Clinton’s foundation cashed in as Sweden lobbied Hillary on sanctions

– The Washington Times – Tuesday, June 2, 2015

Bill Clinton’s foundation set up a fundraising arm in Sweden that collected $26 million in donations at the same time that country was lobbying Hillary Rodham Clinton’s State Department to forgo sanctions that threatened its thriving business with Iran, according to interviews and documents obtained by The Washington Times.

The Swedish entity, called the William J. Clinton Foundation Insamlingsstiftelse, was never disclosed to or cleared by State Department ethics officials, even though one of its largest sources of donations was a Swedish government-sanctioned lottery.

As the money flowed to the foundation from Sweden, Mrs. Clinton’s team in Washington declined to blacklist any Swedish firms despite warnings from career officials at the U.S. Embassy in Stockholm that Sweden was growing its economic ties with Iran and potentially undercutting Western efforts to end Tehran’s rogue nuclear program, diplomatic cables show.

“Sweden does not support implementing tighter financial sanctions on Iran” and believes “more stringent financial standards could hurt Swedish exports,” one such cable from 2009 alerted Mrs. Clinton’s office in Washington. Separately, U.S. intelligence was reporting that Sweden’s second-largest employer, telecommunications giant Ericsson AB, was pitching cellphone tracking technology to Iran that could be used by the country’s security services, officials told The Times. …….. 

Mr. Clinton’s Swedish fundraising shell escaped public notice, both because its incorporation papers were filed in Stockholm — some 4,200 miles from America’s shores — and the identities of its donors were lumped by Mr. Clinton’s team into the disclosure reports of his U.S.-based charity, blurring the lines between what were two separate organizations incorporated under two different countries’ laws.

……… At the time of Mr. Clinton’s foray into Swedish fundraising, the Swedish government was pressing Mrs. Clinton’s State Department not to impose new sanctions on firms doing business with Iran, including hometown companies Ericsson and Volvo.

Mrs. Clinton’s State Department issued two orders identifying lists of companies newly sanctioned in 2011 and 2012 for doing business with Iran, but neither listed any Swedish entities.

Behind the scenes, however, the U.S. Embassy in Stockholm was clearly warning the State Department in Washington that Sweden’s trade was growing with Iran — despite Swedish government claims to the contrary.

“Although our Swedish interlocutors continue to tell us that Europe’s overall trade with Iran is falling, the statements and information found on Swedish and English language websites shows that Sweden’s trade with Iran is growing,” the U.S. Embassy wrote in a Dec. 22, 2009, cable to the State Department that was released by WikiLeaks. The cable indicates it was sent to Mrs. Clinton’s office.

At the time of the warning, Mrs. Clinton was about a year into her tenure as Mr. Obama’s secretary of state and the two were leading efforts in Washington to tighten sanctions on Iran.

……… The Swedes were resistant to new sanctions, telling State Department officials repeatedly and unequivocally that they were worried new penalties would stifle the business between its country’s firms and Tehran. At the time, Iran was Sweden’s second-largest export market in the Middle East after Saudi Arabia.

“Behind the Swedish government’s reluctance to support further sanctions in Iran, especially unilateral European measures, is a dynamic (though still fairly small) trade involving some of Sweden’s largest and most politically well-connected companies: Volvo, Ericsson and ABB to name three,” the U.S. Embassy wrote in one cable to Washington.

Several top Swedish officials made the case against proposed U.S. sanctions in successive meetings in 2009 and 2010, according to classified cables released by WikiLeaks.

“[Swedish] Sanctions coordinator [Per] Saland told us that Sweden does not support implementing tighter financial sanctions on Iran and that more stringent financial standards could hurt Swedish exports,” one cable reported. Other cables quoted Swedish officials as saying they were powerless to order banks in their country to stop doing business with Tehran.

Sweden’s foreign trade minister, Ewa Bjroling, met with State officials and said even though her government was obeying all existing United Nations and European Union sanctions, “Iran is a major problem for the GOS (Government of Sweden) because Swedish businesses have a long-standing commercial relationship in the trucks and telecom industries.”

Eventually, Swedish Foreign Affairs Minister Carl Bildt — Mrs. Clinton’s equal on the diplomatic stage — delivered the message personally to top State Department officials, who described him as “skeptical” about expanded Iran sanctions.

“Overall, I’m not a fan of sanctions because they are more a demonstration of our inability than our ability,” Mr. Bildt was quoted as telling State officials in a cable marked “secret.”

………. Current State Department officials and outside experts who advised the department on Iran sanctions told The Times that Sweden, and more specifically Ericsson, was a matter of internal discussion from 2009 to 2011 before new sanctions were finally issued. “The Ericsson concerns were well-known, but in the end many of the sanction decisions were arbitrary and often involved issues beyond the actual business transactions,” one adviser directly involved in the talks told The Times, speaking only on the condition of anonymity because he was describing private deliberations.

U.S. intelligence officials told The Times that they kept the Obama administration apprised of Ericsson’s activities inside Iran, including the fact that the Swedish firm had provided Iran’s second-largest cellular provider with location-based technology to track customers for billing purposes. The technology transfer occurred in late 2009, shortly after Tehran brutally suppressed a pro-democracy movement in that country, the officials said.

U.S. intelligence further learned that Ericsson in 2010 discussed with Iran’s largest cellular firm providing tracking technology that could be used directly by Iranian security authorities but never formally pursued the contract, officials said.

Read the full story.

2nd day of Indian President’s invisible visit to Sweden wasted on “sustainable”

June 2, 2015

The second day of the President’s State Visit to Sweden was about as invisible in the Swedish (and Indian) media as the first. The theme of the day was “sustainable development of towns and cities” which is one of these “politically correct” but quite meaningless themes where the word “sustainable” is added for the sake of form. India is not immune to the disease of fashionable phrases and is trying to develop about 100 “smart” cities where “smart” like “sustainable” is a meaningless term. Nothing labelled “sustainable” or “smart” has any value if it is not first economically viable. Most projects which are labelled “sustainable” usually include the term only because it makes getting funding so much easier. More often than not, the use of such fashionable, politically correct descriptors is a certain indicator that the project is not economically viable.

It would have been far better if instead of “sustainability nonsense” the visit of the President could have focused on how Swedish technology and investment could assist development and be made relevant for Indian conditions – and always with the proviso that the development had to be economically viable.

Sweden is one of many European countries which is pouring money down the black hole of so-called “sustainable” projects which are not economically viable. The Swedish Minister for Housing and Urban Development is Mehmet Kaplan, from the Green Party. He is something of a specialist at proposing “sustainable” but uneconomic projects. (I am not sure if the Indian Ambassador had done her homework and had informed the President that Kaplan is also the person who thought that radicalised Swedes who went to join IS could be compared to Swedish-Finn patriots returning to Finland to fight against the Russians. India has a particular problem with radicalised Muslim youth who are fodder for the Pakistan-based terrorist groups operating in Kashmir.)

From the Royal Court:

…. The president’s second day in Sweden began in Parliament and a meeting with President Urban Ahlin. Subsequently, Prime Minister Stephen Löfven received him for talks at Rosenbad. Topics discussed included cooperation between Sweden and India and the prospects for increased exchange of trade and science.

The King and Queen, The Crown Princess and the President then participated in a seminar on sustainable urban development, which took place at Stockholm City Hall. Gunnar Söderholm, head of Stockholm’s environmental management made a presentation entitled Sustainable Stockholm.  Stockholm city thenwere hosts for the  lunch at the city hall.

The afternoon program continued on the theme of sustainable urban development with a trip to Hammarby Sjöstad. The day ended with the King and Queen’s gala dinner for the President.

There seem to be very few interesting pictures from yesterday.

Sofia Hellqvist, Prins Carl Philip, Drottningen, Indiens president Shri Pranab Mukherjee, Kungen, Kronprinsessan och Prins Daniel. Foto: Janerik Henriksson/TT

Sofia Hellqvist, Prince Carl Philip, Queen Sylvia, Pranab Mukherjee, The King, Crown Princess Victoria and Prince Daniel. Photo: Janerik Henriksson/TT

Lunch at Stockholm City Hall, 1 juni 2015. Photo Kungahuset.se

Today is the last day of Pranab Mukherjee’s State Visit.

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

May 30, 2015

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).

Israel demands its monetary “pound of flesh” for any US-Iran deal

May 20, 2015

It would seem that much of the Israeli objections to any US-Iran deal regarding Iran’s nuclear programme may be more of a negotiating ploy than driven by any real concern about their own security. Everything has its price and Israel also seems to have a price for swallowing their public objections. The price for acquiescing to any US-Iran deal seems to be the “purchase” of additional military aircraft and weapons systems from the US. Israel’s “purchases” of US equipment are paid for from moneys received as “US Defense Aid”. Currently Israel gets a recurring grant of around $4 billion every year augmented by many additional “one-off” grants.

From this Haaretz article it would seem that Israel has determined the monetary value of the “pound of flesh” it requires to swallow its objections to any US-Iran deal. Israel has not failed to note that “According to Stockholm’s International Peace Research Institute, in 2014 Saudi Arabia bought $80 billion worth of weapons while the emirates bought $23 billion worth of arms.” It stands to reason that Israel’s total “price” will be something in excess of $100 billion. The US will not have missed in their calculation either that this will “enable” fresh, real sales of military equipment to Saudi Arabia and the Gulf States of at least twice that amount.

Haaretz:

….. However, the Israeli defense establishment and the Pentagon have already begun preliminary contact on the type of defense package Israel would receive. Another incentive for these talks is the arms deals between the United States and the Gulf states, which have not waited for the final deal before acquiring defense systems designed to deter Iran. A well-placed source said that both countries have begun their “homework” ahead of such a deal. ….. 

The Israeli defense establishment estimates that the future weapons deal between Israel and the United States will include more F-35s. So far, the sides have agreed that Israel would buy 33 of these combat aircraft using U.S. defense aid. The first two planes are scheduled to arrive in late 2016. The first operational squadron of the planes will begin operations about two years later, with the last of the planes arriving in 2021. However the defense establishment believes this is not enough and hopes to acquire at least 50 of these fighter planes so the Israel Air Force will have two fully operational squadrons. Each plane in the current deal is priced at $110 million.

Another key component in any future arms deal with Washington will be an anti-missile system. So far Israel has acquired an Arrow 2 system to intercept long-range missiles and nine Iron Dome batteries against short-range missiles. Next year, the David’s Sling system for medium-range threats is slated to go into operation. All these systems were funded with American defense aid and the United States has invested about $1 billion in developing interception missiles, above and beyond the $3.1 billion annual aid.

Israel is also likely to request additional aid to finance an improved Arrow 3 battery and to acquire some more Iran Dome batteries. According to an analysis by the Knesset Foreign and Defense Committee from three year ago, which is also accepted by the army, Israel requires at least 12 or 13 batteries in order to effectively defend the country. Israel is also expected to ask the U.S. to allow it to buy advanced precision-guided munition, especially for the Air Force. The sides may also discuss the acquisition of technological systems for intelligence-gathering purposes. 

The defense industry in the US must be quite pleased.

EC looking for GE concessions to approve Alstom acquisition

May 12, 2015

UPDATE!

The New York Times also reports on the potential anti-trust issues and GE’s readiness to make some accommodations for EC concerns. However my take away from the NYT article is that GE is warning the EC that Alstom and the European Union have more to lose than GE has if the deal does not go through:

In now dealing with the European Commission’s antitrust office, Mr. Immelt has not forgotten the harsh experience of his predecessor, Jack Welch. In 2001, Mr. Welch failed to win approval for a proposed $42 billion takeover of Honeywell International after objections were raised by Mario Monti, the European antitrust commissioner at the time.

Mr. Immelt was worried enough last week that he met with Ms. Vestager in Brussels, where he also gave an address at the American Chamber of Commerce highlighting Europe’s economic potential. In that address, Mr. Immelt said young Europeans were “awesome” and “amazing,” but he emphasized that Europe needed investment to gain competitiveness and beat unemployment.

Speaking to reporters later, Mr. Immelt said his meeting with Ms. Vestager was “very constructive” and he described her as “a good leader.” G.E., he said, was engaged in “a process” with Brussels, and would “take the process where it goes.”

If G.E. is unable to convince Ms. Vestager of the merits of its case, the next step could be a so-called statement of objections, as soon as next month — formal charges that would outline the commission’s specific antitrust concerns. G.E. and Alstom could avoid that step by offering remedies sooner, perhaps proposing to sell parts of the gas turbine business in Europe.


My expectation was that the European Commision would look for some concessions from GE and would only grant a conditional approval for the acquisition of Alstom’s power and grid businesses.

The EC concerns seemed to be focused on Heavy Duty Gas Turbines (HDGT), and I wrote:

Will the EC approve GE’s acquisition of Alstom’s power business?

…. In any event,  I expect that the deal will go through, but I will not be surprised to see an approval conditional on some assurances from GE regarding R & D centres, R & D jobs and/or R & D budgets in Europe. I think it highly unlikely – and a little meaningless – if the EC were to ask for divestment of Alstom’s HDGT business to a third party (if any such exists). The bottom line is, I think, that Alstom’s HDGT technology has come to a dead-end and can not be developed any further in their own hands. While the business can continue in a diminishing way for some years, Alstom technology has no long-term value except to another party which has access to high temperature cooling technology. To have Alstom continue with the HDGT business as an unwilling and reluctant player does no one any service at all.

This Reuters report today suggests that my expectation may be close to the mark. However it also seems that if the EC demands too much in the way of concessions, GE might walk away. Clearly GE are already getting a little irritated at the protracted nature of the EC approval process. The failure of the deal is not something that Alstom or the EU would look forward to.

The EC decision may also be delayed somewhat beyond August 6th.

Reuters:

General Electric Co said on Monday for the first time it would be willing to consider concessions in order to win European approval to acquire the power equipment unit of France’s Alstom. “We are willing to explore remedies to get this deal done even though again we believe in the merits of the deal,” Steve Bolze, president and CEO of GE Power & Water, the conglomerate’s biggest industrial unit, told Reuters in an interview. Any concessions would have to “preserve the deal economics and our strategic value,” he said. …

… EU regulators typically prefer merging companies to sell overlapping assets or make it easy for rivals to enter the market. GE’s gas turbine competitors include Siemens AG and Mitsubishi Heavy Industries Ltd.

…GE already altered the deal to win the French government’s backing during last year’s two-month battle, in which it fended off Siemens and Mitsubishi. In the interview, Bolze acknowledged the “protracted process” for Alstom, and said GE was focused on “how to move … forward as it makes sense.”

In GE’s first-quarter conference call last month, Chief Executive Jeff Immelt backed the deal’s fit for GE, but said if it “ever would become unattractive, we wouldn’t do it.”

…. GE, which is undergoing an overhaul involving the exit of most of its finance assets, has said it expected synergies from the Alstom deal to add between 6 to 9 cents in earnings per share in 2016. But some analysts have told Reuters they doubt GE’s stock would take a big hit should the deal collapse, with the idea that GE could make up those earnings with stock buybacks or other deals. ……. 

…… EC spokesman Ricardo Cardoso said regulators are waiting for data from the companies before a setting a new deadline to act. The previous deadline was Aug. 6.

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.

Will the EC approve GE’s acquisition of Alstom’s power business?

May 3, 2015

UPDATE! 

Bloomberg: General Electric Co.’s Jeffrey Immelt is set to meet with the European Union’s antitrust chief Tuesday as the U.S. company seeks approval for its acquisition of Alstom SA’s energy business.

The session in Brussels between GE’s chief executive officer and Margrethe Vestager is part of regulators’ “ongoing merger review,” Lucia Caudet, a European Commission spokeswoman, said in an e-mail.


On February 23rd this year the European Commission announced that its preliminary investigation into the proposed acquisition of Alstom’s power businesses by GE had highlighted Heavy Duty Gas Turbines (HDGTs) as a potential area of concern. Therefore an in-depth investigation would be carried out. This investigation was due to have been completed by 8th July but has been extended – apparently at GE’s request – till August 6th.

The European Commission has opened an in-depth investigation to assess whether General Electric’s (GE) proposed acquisition of the Thermal Power, Renewable Power & Grid businesses of Alstom is in line with the EU Merger Regulation. The Commission’s preliminary investigation indicates potential competition concerns in the market for heavy-duty gas turbines which are mainly used in gas-fired power plants.

Since GE already has HDGTs  in direct competition with Alstom’s GT24 and GT26 engines and even with Alstom’s GT11N2 and GT13E2 engines, I expect that the Alstom range of machines will have to be discontinued. (It would be quite irrational for GE to continue to offer Alstom’s portfolio except for a very restricted time period or for some very particular application. It is not much appreciated by a buyer either when a supplier appears so confused as to offer different machines for the same purpose). The discontinuation of some engines is “no big deal”. But, as I have written previously, it would be a shame if the line of technology for HDGTs within Alstom – which carried forward the lines of technology emanating from BBC, GEC, Asea and ABB (including sequential combustion technology) – were to be entirely lost.

I would summarise the EC’s potential areas of concern as being:

  1. If the European HDGT market can be said to be distinct from the global market, then the number of HDGT suppliers would effectively reduce in Europe from three to two.
  2. Reduced competition in Europe could lead to supplier(s) having greater than 40% market share and could lead to an increase in prices.
  3. GE together with Alstom could have greater than 50% market share and not only in Europe.
  4. In Europe, fundamental R & D on combustion, emissions and materials and innovation regarding HDGTs would be hurt, and
  5. Competition in the HDGT service business would be impacted since Alstom currently is an alternate supplier of service to older GE HDGTs (since Alstom was a GE licencee prior to 1999).

The market for HDGTs is characterised by high technological and financial barriers to entry, leading to a concentrated market with only four globally active competitors: GE, Alstom, Siemens and Mitsubishi Hitachi Power Systems (MHPS). The fifth player, Ansaldo, appears to be a niche player with a more limited geographic reach. The margins in the market for HDGTs appear to be higher than those of neighbouring markets for power generation equipment such as steam turbines. 

The HDGTs market worldwide is divided into two frequency regions, namely those operating at 50 Hz and those at 60 Hz. All thecountries in the European Economic Area (EEA) operate at 50 Hz frequency.

Since MHPS seems to be less active in the EEA than in the rest of the world, the transaction would bring together the activities of two of the three main competitors in the EEA.The transaction would eliminate Alstom from the market, leaving European customers without an important competitor of GE and Siemens. Indeed, in the market for the sale of new 50 Hz frequency HDGTs, the merged entity would reach high market shares in the range of around 50 %, both in the EEA and at worldwide level excluding China.

Furthermore, the transaction might significantly reduce R&D and customer choice in the HDGT industry. After the merger there is a risk that GE would discontinue the production of certain Alstom HDGT models and that advanced HDGT technology developed by Alstom would not be brought to the market.

Finally, in the market for the servicing of General Electric’s mature technology HDGT frames, the transaction eliminates competition by Alstom’s subsidiary Power System Manufacturing.

Overall, the Commission is at this stage concerned that the transaction may lead to an increase in prices, a reduction in customer choice and a reduction of R&D in the HDGT industry, leading to less innovation.

I note that GE have taken on a very-high powered lawyer to help in dealing with anti-trust issues,

Sharis Pozen, a former acting assistant U.S. attorney general for antitrust who joined Skadden, Arps, Slate, Meagher & Flom in July 2012, left the firm this month to become vice president for global competition and antitrust at General Electric. Pozen is the latest high-profile Am Law 100 partner to join the in-house legal ranks of the Fairfield, Conn.-based conglomerate, which has tapped Skadden to advise on its pending $17 billion buy of the energy unit of French engineering giant Alstom.

However, my own opinion is that these potential EC concerns are not sufficient to disallow the proposed acquisition. I believe the market concerns are more theoretical than real.

1. While the EC tends to look at market share rather than market size, the EU market currently (before the advent of shale gas in Europe) is so small that it cannot be considered a market distinct from the global market. No HDGT manufacturer could survive on the strength of the European market alone. A simple test question is very revealing. Could Alstom’s HDGT business be sold as an independent stand-alone business to anybody else with only Europe as the designated market? The answer is a resounding NO and, I think, should eliminate any consideration of the European market as being distinct from the global market.

In fact, even with a global market available, the Alstom HDGT business is of little value to any manufacturer who does not already have high temperature cooling technology and who does not already have a heavy rotating machinery manufacturing background. And I don’t see any such parties around.

2. It should be remembered also that Mitsubishi (formerly MHI now Mitsubishi Hitachi Power Systems – MHPS) is absent from Europe as a matter of their own choice – not because they cannot. It is part of the remains of the old “unofficial” arrangement where the Japanese didn’t come into Europe and the Europeans didn’t enter Japan. This “arrangement” for steam turbines, gas turbines, boilers and generators held quite well through till the 1980s but broke down in the 1990s. Note that the Japanese gas turbine market had a special relationship with the US manufacturers with TEPCO providing GE with a protected “home” market for 60 Hz gas turbines. The Westinghouse relationship with MHI for gas turbines was effectively taken over by MHI. The Siemens equity engagement with Furukawa to create Fuji Electric (Fu- for Furukawa and Ji for Siemens in japanese, jiimensu) was ended after WW 2. The ABB (later Alstom) JV for gas turbines with Kawasaki which I headed for a time was only set up in the 1990s and was eventually discontinued.

To enter a new market for HDGTs, it must either be a growing market or it must have a large fleet of existing machines which can be served. Europe provides neither for MHPS at the present time. If shale gas takes off in Europe and the gas turbine market starts to grow (which I predict will happen), it will not take very long for MHPS to enter.  For MHPS the market size and growth for new equipment must be sufficient to justify the cost of setting up the necessary service network. There is no guarantee either that Alstom – without GE – could continue with a product range rapidly becoming uncompetitive against the “J” class machines, without access to high temperature cooling technology. The Ansaldo/Shanghai Electric tie-up is still in its infancy and – in the event of market growth in Europe – would surely become a significant 4th player. (Even a 5th global player could emerge as a consequence of a particularly strong market growth and my guess would be that it could be Doosan or BHEL, Harbin or from Russia). But as far as the EC is concerned, the key point should be that if the market grows there will be certainly three, probably four and eventually five players. And if the market does not grow then the objection is moot.

3. The risk of one player having 50% (or greater than 40%) market share is not to be trivialised but, in my opinion, is not a real threat. When the market (in Europe) has been as low as it has been and only one or two machines are sold in a year it is a quirk of arithmetic that one player may have a 100% market share in one year or that two may have 50% each. Customers are very well aware of the dangers of having only 2 suppliers. The fact is that if the market were large enough, MHPS and Ansaldo and others would be strongly encouraged to quote by the European buyers. We would probably then have a global market share split of GE/Alstom – 30%, Siemens – 30%, MHPS -20, other (Ansaldo, BHEL, Russians, new players ….) – 20%. When a market is small, market share is misleading and meaningless. In a strong market some of the manufacturers of small gas turbines would also try and follow their customers into larger sizes – a “Honda” strategy.

4. R & D is where I began my career and safeguarding innovation is rather special for me. There is a valid point regarding R&D and innovation and I think it would be perfectly justified for the EC to give approval conditional on some kind of assurance from GE that R &D centres (and possibly R & D jobs and budgets) in Europe would be maintained for some period of time. I don’t believe that innovation can be mandated, but I do see a potential benefit for GE – in time – in absorbing and – even adopting – some sequential combustion elements in their mid-range (rather than their largest) engines (see diagrams below). But that is a call for GE to take in about a decade from now. (It is probably just wishful thinking on my part).

Alstom (as BBC) developed the sequential combustion cycle in 1948 and (as ABB) the GT24 and GT26 engines in the 1990s, when GE moved beyond the “F” class machines to their “FA” machines. The choice was a forced one for ABB, and they had to follow the sequential combustion path because they did not have access to the high temperature blade cooling technology which was available to their competitors. All their attempts to acquire such technology from Russia failed. A technology agreement with Rolls Royce gave no technology ownership and had very strict limitations. Sequential combustion eventually converted a weakness into a virtue and allowed ABB (later Alstom) to maintain efficiency and compete with “G” class machines even though they were effectively limited to an “F” class inlet temperature as a maximum. If ABB had not developed the GT24 and the GT26 – in spite of all their early challenges – Alstom would not have acquired ABB’s power generation business after their GE licence was terminated. (In fact the challenges were so large that ABB had to compensate Alstom through the acquisition price for the power business for all the problems that had to be fixed by Alstom in the field).

Taking a very cynical view, ABB had reached the end of their road with GT development when they divested to Alstom. Alstom in their turn made devlopments that ABB could not but have also reached the end of their road for development of sequential combustion technology – again because of a lack of high temperature cooling technology – and wish now to divest to GE.

GT cycles - conventional and sequential combustion

GT cycles – conventional and sequential combustion

Now as GE, Siemens and Mitsubishi have moved on to even higher inlet temperatures, the “G” class has gone on to become the “J” class. (The “H” class was Mitsubishi attempting to use steam cooling for the turbine blades which didn’t really catch on and “I” has been passed over for the designation of turbine class). Alstom, with its limitations on temperature have successfully squeezed the sequential combustion technology to approach a “G+” performance with temperatures slightly lower than a “G” class from the others. But Alstom now also has reached its temperature limits and, I suspect, it was the lack of a way forward for their machines to compete with “J” class machines which has been part of their decision to get out of power generation.

But I like the concept of sequential combustion which is elegant and fundamentally sound and I look forward to the day when maybe it can be applied together with the high temperatures that GE knows how to handle. Then maybe we will someday see an “M” class gas turbine with 1600ºC and sequential combustion?

M Class GT?

M Class GT?

It can be argued therefore that the acquisition is what may actually keep R & D alive instead of it coming to a stop in the cul-de-sac in which it is stuck with Alstom.

And without R & D and high temperatures and new competitive “J” class products, Alstom’s days as a cutting-edge HDGT supplier would have been limited anyway.

5. The older GE machines  are still serviced by GE licencees and former licencees around the world – including in this case by Alstom (for GE machines prior to 1999). This Alstom does by means of a special subsidiary set up for the purpose. This unit – Power Systems Manufacturing – specialises in formerly licenced GE machines and also acts as a “pirate” for Siemens and Mitsubishi machines.

PSM’s product line includes … parts for GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine.

Siemens also has such a subsidiary unit – Turbo Care – to service – where they can – the machines of competitors. This used to be a separate Siemens entity but has now been approved by the EC as a JV with the Wood Group. The “pirate” service business is important to each manufacturer – for intelligence and competition purposes – but the volume is quite small. No customer would select a “pirate” rather than the OEM, except for older machines past their prime or perhaps to teach the OEM “a lesson”. The “pirate” business is just not possible on relatively new machines and really only applies to machines installed more than about 10 years previously – when all liabilities and potential liabilities of the OEM have fallen away. No GT owner would take the risk of resorting to a “pirate” for a relatively new machine. A customer would usually resort to “pirates” only when all investment costs have been fully written off and he is no longer looking for – or particularly needs – any performance or availability guarantees. Even design and manufacturing warranties to be provided are strictly limited since the “pirate” has to rely on reverse engineering.  “Pirates” only come into the picture when the perceived risk levels are low.

The EC concern that if PSM is merged into GE, that some competition for the older GE machines will disappear is not correct I think, because for these older machines the competition for service business is far more with other “pirates” than with the OEM. And there are plenty of “pirates” around.

In the long run I judge that this acquisition is good for the customer, may even be good for R & D and even good for Siemens (and also for Mitsubishi). I imagine that any objections from Siemens are more for the sake of form (and because there is no love lost between Patrick Kron and Siemens).

In any event,  I expect that the deal will go through, but I will not be surprised to see an approval conditional on some assurances from GE regarding R & D centres, R & D jobs and/or R & D budgets in Europe. I think it highly unlikely – and a little meaningless – if the EC were to ask for divestment of Alstom’s HDGT business to a third party (if any such exists). The bottom line is, I think, that Alstom’s HDGT technology has come to a dead-end and can not be developed any further in their own hands. While the business can continue in a diminishing way for some years, Alstom technology has no long-term value except to another party which has access to high temperature cooling technology. To have Alstom continue with the HDGT business as an unwilling and reluctant player does no one any service at all.


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