Archive for the ‘Energy’ Category

GE gets approval from the EC and Ansaldo gets Alstom GT technology

September 8, 2015

UPDATE:

More details are now emerging of what exactly will go to Ansaldo. It seems that Ansaldo will get PSM, technology for the GT26 and the GT36 (which does not exist yet) including the test facilities at Birr and the LTSA’s for 34 GT26s sold by Alstom. It is good that it is settled but the European Commission has not – in my opinion – got it quite right.

  1. The technology seems to be restricted to 50Hz technology (after all, all of Europe is 50Hz). So a current GT26 and its potential upgrades should – theoretically – be available from Ansaldo but not the GT24 (60 Hz). It is the US market (60 Hz) which has access to cheap gas and the 50Hz market will take a while and will be dependant on fracking taking off in Europe. Ansaldo will probably need to take all liabilities to get their first 2 or 3 GT26 engines placed. And even then finding a suitable utility customer to host the machines will pose a challenge.
  2. GE will face no competition in the US from an Ansaldo GT24 and probably Ansaldo is not permitted to enter 60 Hz markets except with engines they develop themselves.
  3. The development of the GT36 is a long way from being commercialised and the assumption by the EC that this development will be completed by Ansaldo is almost “pie in the sky”. Of course it is theoretically possible! A 60Hz GT34 is even less likely.
  4. The EC’s assumption that PSM will be able to service engines like the GE 9FA under Ansaldo ownership is flawed. It is one thing to have an Alstom owned PSM servicing such engines considering that Alstom was the main source of GE 9FA until 2000 (when they acquired the ABB gas turbine business), and quite another to have an Ansaldo owned PSM doing such service.

I suspect that GE and Alstom have talked down the difficulties that Ansaldo will face and the EC have bought the sales pitch. Or it could be that the EC does know that this commercialisation of the GT36 (and maybe even the production of the GT26) by Ansaldo will likely not happen, but it gives them a face saving way of approving the GE bid.

Money talks. And we need to bear in mind that GE pays only €300 million less which must now presumably come to Alstom from Ansaldo. Just €300 million as the price for the ongoing service business and the assets at the R &D facilities at Birr does not leave much over actually for the technology that has been purchased.

But

  1. does Ansaldo have the additional €500+ million that they will need to get a GT26 into production?
  2. And do they have another €2 billion (at least), along with the will and the capability, to bring a commercial GT36 into being??

PowerMag:

The commission’s in-depth review, which focused on markets for the sale and servicing of heavy-duty gas turbines operating at 50 Hz, revealed that a GE-Alstom merged entity would have accounted for more than 50% of the European Economic Area market.

It was also specifically concerned that the merger would have risked eliminating an important innovator. “The transaction as notified would have reduced customer choice, R&D [research and development] and innovation, with serious risks that certain Alstom heavy duty gas turbine models would be discontinued and that the newly developed and most advanced model (GT 36) would not be commercialised. This was of concern for many market participants, including major European power utilities,” the commission said.

The merger was approved on the condition that the parties offered to divest Alstom’s GT 26 and GT 36 turbine technology, existing upgrades and pipeline technology for future upgrades, a large number of Alstom R&D engineers, and two test facilities for the GT 26 and GT 36 turbine models in Birr, Switzerland.

The parties will also need to divest long-term servicing agreements for 34 GT 26 turbines recently sold by Alstom, and Alstom’s Power System Manufacturing (PSM) subsidiary. The commission was concerned that if GE absorbed PSM, it would have eliminated competition for the servicing of GE’s mature heavy-duty gas turbines (like its 9FA model) that are installed in existing plants. “As GE is the dominant player in this market and PSM its most significant potential competitor, this would have created a risk of higher prices and less innovation,” it said.

34 gas turbines is a small part of Alstom’s fleet but it may be enough to give Ansaldo a fighting chance of building up experience over – say – 5 years or so.

I remain of the opinion that this is a good deal for Alstom and GE. However, I also remain of the opinion that some 8,000 jobs of those being transferred from Alstom to GE or to Ansaldo will be at risk. Ansaldo surely has a chance for becoming one of the “big 4”. But they may have difficulty chewing or swallowing what they have just bitten off.

Another thought that occurs to me is that the EC process is itself flawed. The solution (divestment to Ansaldo), which has delayed the deal by a year, smacks more of ego and politics rather than protection of competition. The actual protection of competition achieved is minimal.

WSJ: ……. GE already manufactures gas turbines of corresponding size to the two Alstom models, and the company says it will retain licenses that will enable it to compete for business servicing turbines made by other manufacturers—an opportunity for future earnings growth.

The U.S. company will also divest the long-term servicing contracts for 34 turbines that have already been installed by Alstom. GE has said that Alstom’s servicing contracts were a key attraction of the deal, but a person close to the deal said the divested contracts amounted to only 4% of Alstom’s total installed base.

“I am glad that we can approve this transaction, which shows that Europe is open for business and that Europe-based technology can thrive and attract foreign investment,” Ms. Vestager said.


 

Well, the European Commission has given GE approval for the acquisition of Alstom’s power and grid businesses. But Ansaldo will now get Alstom’s large GT technology (it’s not clear to what extent), the testing facilities in Birr and some substantial service business. Whether Ansaldo actually gets the GT24 and GT 26 engines or just technology is not clear yet.

Previous posts: https://ktwop.com/tag/alstom/

Bloomberg:

As part of GE’s offer, Ansaldo will acquire Alstom’s technology for large and very large gas turbines. Alstom will also cede two test facilities for these turbine models in Birr, Switzerland, the EU said.

“Ansaldo will have a true fighting chance” of competing in the European market, Margrethe Vestager, the EU’s competition commissioner, told reporters in Strasbourg, France.

The Italian firm should gain a foothold in the maintenance business by taking over long-term contracts Alstom holds to service 34 previously-sold gas turbines, the commission said. Ansaldo will also acquire Alstom’s Power Systems Manufacturing unit which can service gas turbines of different makes, the regulator said.

With PSM going to Ansaldo, Shanghai (via PSM) gets a foothold in the US for 3rd party engine service – for whatever that may be worth. But I am not very hopeful. As an owner, I would not be very keen on asking an Ansaldo owned PSM to service a Siemens or a GE engine or even an old Westinghouse engine.

Good luck to Ansaldo anyway.

It will be interesting to see if Shanghai Electric can provide sufficient influence to make this work. Ansaldo on its own would have very little chance to make it, I think. It will still take them the best part of a decade and by then GE, Siemens and Mitsubishi would have moved on. I think the EC’s competition commissioner is fooling herself more than a little when she states that “Ansaldo will have a true fighting chance”. She is being far too optimistic, but maybe Shanghai can make the difference.

The Ec’s conditions does not have a great impact on the jobs that will be lost. This will stay at around 8,000 I think for GE. Of the jobs shifted to Ansaldo, I am not very optimistic.

A pity, because I think this marks the end of sequential combustion with a viable player.

I wouldn’t mind being proved wrong – but the probability is rather low.

But it’s good news for both Alstom and GE. For Ansaldo, it may be too much of a mouthful.

12% job losses to be expected post approval of GE – Alstom deal

September 4, 2015

Everything points to GE getting approval next week from the European Commission (deadline 11th September) for its acquisition of Alstom’s Power and Grid businesses – subject to some of the remedies proposed by GE to meet EC concerns about competition. The specific nature of the remedies have not been made public but rumours indicate that these comprise divestment of a service company and a facility in Switzerland to Ansaldo along with some IP, (see previous posts).

Around 65,000 Alstom employees would be transferred (though I am assuming that the JV’s being set-up (Grid, Renewable Power and Nuclear) are just a step along the way to complete divestment. Alstom can exit the Grid and Renewable Power businesses (50% minus one share) by September 2019 for an exit price not less than the acquisition price +3% per year. Alstom has windows for exit from the Nuclear JV (20% minus one share) “for 3 months after the 5th and 6th anniversaries of the joint venture” with an “exit price not to be lower than acquisition price +2% per year”. I assume that Alstom has a put option and that GE is obliged to buy – provided of course that no hidden liabilities show up in the businesses as happened when Alstom acquired ABB’s power generation business in 2000.

Alstom GE JVs (EGM Dec 2014)

Alstom GE JVs (EGM Dec 2014)

Alstom EGM presentation 2014-12-18

Alstom employees breakdown March 2014

Alstom employees breakdown March 2014

That there will be job losses among the 65,000 so transferred is inevitable. The logical conclusion would be that jobs in high-cost countries – except where they are also where the market is – would be most at risk. But as I saw through my years at ABB and Alstom, logic does not always apply. Both ABB and Alstom were (and probably still are) very Eurocentric. Quite often I saw under-utilisation in Europe being taken as the “cost to be avoided” rather than the minimising of total cost. Then, fully loaded jobs in low-cost countries were removed or transferred to Europe to increase loading in European facilities – but which only helped to increase total costs. Also, it was always so much cheaper (redundancy payments) to get rid of jobs in India or China or Indonesia than in France or Germany. So I do expect that similar “political preferences” will still apply for European jobs, though GE should be less inclined to fool themselves over the false economy of maintaining high-cost jobs for saving the “avoided cost” of under-utilisation. (A qualified, engineering job in Europe costs – or saves – at least twice as much as one in India or China after including for wages and all support facilities). On the other hand, GE now has to fulfill some political expectations from the French government and the European Commission. So jobs in France are protected and possibly also in Italy as well, but Eastern Europe and even some developing countries may well take a hit. Switzerland is quite exposed, both for cost and lack of political clout in the EU.

However, GE is also under pressure to implement its cost cutting program and the delay in the EC approval only adds to the pressure to make quick cuts.

ReutersGeneral Electric Co is expected to win regulatory approval next week for its purchase of the power equipment business of France’s Alstom, allowing the U.S. industrial conglomerate to finally carry out a major cost-cutting program 16 months after first announcing the deal. ……… 

In May, GE told investors it expects $3 billion in cost reductions over the next five years as it combines its operations with those of Alstom, more than double the previous target when the deal was first announced in April 2014.

GE has also projected the deal would add 15 to 20 cents per share to earnings in 2018, or nearly 10 percent of GE’s overall profit expected that year by Wall Street, according to Thomson Reuters.  

To hit those goals, GE will consolidate manufacturing operations, cut duplicated overheads, and make savings on purchasing expenses, according to GE presentations on the deal. But to gain the blessing of the French government last year, GE committed to add 1,000 jobs in the country, possibly handcuffing the conglomerate’s ability to reap savings from Alstom’s home base.

My (entirely speculative) reasoning suggests that GE must reduce this 65,000 employees from Alstom by around 12% quickly – say over 12 – 18 months. GE should certainly be able to reduce headcount globally by around 8,000. That will give a saving of only around €500 million annually (€800 million if all the job cuts were in Europe) and further rationalisation will still be needed if GE is to meet its target of $3 billion cost reduction in 5 years. (A $3 billion annual cost reduction is massive. If it was all to be found only by job reductions it would mean around 30,000 jobs).

Over 1,200 of these jobs could go as a consequence of the “remedies” proposed by GE and the consequent divestments to Ansaldo. Around 1,000 of these jobs in Switzerland will likely transfer to Ansaldo and then perhaps around 600 will disappear completely. I note that around 3,000 of the 65,000 jobs transferred are for shared and common services (IT, support facilities, legal and the like). I would be quite surprised if GE could not find sufficient synergies with their existing staff in these areas, and cut at least 1,500 of these jobs. Between 6 and 7,000 of the jobs transferred would be in the US where GE is already very well represented. Again, I would be quite surprised if GE could not find at least 1,000 jobs in the US which were effectively duplicates. Some duplicate manufacturing facilities would also need to be rationalised (Poland? China? Italy?).

It is only my speculation but I could see the initial 8,000 jobs to be reduced consisting of (as an example),

  1. 1,000 in Switzerland divested to Ansaldo
  2. 200 in other locations (service business) divested to Ansaldo
  3. 1,500 reduction in central and shared services
  4. 1,000 jobs rationalisation in the US
  5. 1,000 manufacturing and engineering jobs in duplicated facilities
  6. plus a 5% personnel reduction across the board

There will be much pain in the short-term. I have been through the process myself on more than 6 occasions (downsizing or acquiring or being acquired), and it is the handling of people which is by far the biggest challenge. While it will be of benefit to both Alstom and GE in the long-term (to their investors, their continuing employees and to their customers), that is not much comfort to those who lose their jobs.

India to more than double coal production in next 5 years

August 26, 2015

Coal production in India is not keeping up with consumption. One of the bottlenecks has been the private production of coal which was expected to grow much faster but has been hampered by scams and bureaucratic regulation. Now the Coal Mines Special Provision Bill was passed in March and is meant to encourage the private sector and allows foreign investment through an Indian subsidiary.

The government is very ambitious and targets a domestic annual production of 1.5 billion metric tons by 2020 which is 2.5 times larger than the current 600 million metric tons.

India coal production target

The US Energy Information Administration (EIA) reports:

Coal consumption in India, particularly in the electric power sector, is outpacing India’s domestic production. From 2005 to 2012, India’s coal production grew by only 4.7% per year to about 600 million metric tons while the country’s coal-fired electric power capacity grew by a much faster rate (about 9.4% per year), reaching 150 gigawatts. To help resolve the shortfall in coal supply and to support expanded coal-fired generation, India has set a coal production target of 1.5 billion metric tons by 2020. Recent shifts in government policies and practices may play a key role in India’s ability to meet this coal production goal.

Increasing coal production from its national coal producer. Coal India Limited (CIL), the national coal producer responsible for more than 80% of India’s current production, initially planned to produce 1 billion metric tons of coal by FY2020, almost double its FY2015 production. Although CIL revised its current expectations downward to about 900 million metric tons, its annual production must still rise faster than the current rate of increase to achieve its new goal. Since 2012, CIL has increased coal production by outsourcing production operations to private and foreign companies in an effort to improve mechanization and mining expertise and by working to adhere to detailed mine plans for achieving its 2020 production target.

Encouraging greater private and foreign participation. In August 2014, allegations of impropriety, hoarding of coal resources, lost government revenue, and a lack of transparency led India’s Supreme Court to cancel 214 coal licenses allocated to the private and public sector, representing 9% of FY2013’s production. The Ministry of Coal quickly reauctioned many of these properties to help minimize the disruption from the cancellation, but the impact of this redistribution of coal properties on production is uncertain.

Private mining may be expanded further as a result of the Coal Mines Special Provision Bill passed in March. This law opens the door to commercial coal mining by both private companies and foreign companies having an Indian subsidiary. The government is now evaluating the effect of a coal block auction to allocate properties for commercial development—a significant change for a coal industry that has been nationalized for 40 years.

The simple reality is that coal is essential – and irreplaceable – for Indian development and growth.

Oil price destroys viability of Scottish independence

August 24, 2015

The Scottish National Party (SNP) once had budgeted on the basis of oil price being $115/ barrel. Then at the time of the referendum they assumed a price of not less than $100/barrel giving a tax revenue of not less than £7 billion per year which would offset the “subsidy” that Scotland gets from the rest of the UK of about £9 billion per year. This tax revenue drops to zero with a North Sea oil price of less than $50/ barrel.  But the breakeven price for oil producers is even higher:

Forbes (Jan 2015)Some prospects, including almost all activity West of Shetlands, are considered unprofitable below $100 per barrel. Mature oil wells struggle to be viable below $60, so BP has decided that 200 jobs and 100 contractors’ roles would go following a review of its North Sea operations managed out of Aberdeen, Europe’s oil and gas capital. Looking ahead, BP forecasts the oil price to remain in the $50 to $60 price range for next three years. ………

Either way, BP’s take has darkened the mood in the British and Norwegian sectors of the North Sea. However, it isn’t the first to announce job cuts. If anything, BP’s move is pretty predictable given the company has been quite clear about reducing employee headcount.

Shell, Statoil and Chevron have made similar announcements while ConocoPhillips has also been clear about a need to “streamline operations.” As operators downsize, oilfield services companies would invariably feel the pinch from independent upstarts to market leader Schlumberger.

But reality is biting hard. It is now more likely that Brent oil price will be trapped between $30 and $40 for the next 2 -3 years. Costs of production in the North Sea have not come down much compared to the sharp decline in US production costs of oil from fracking. And now Iranian oil will take its market share. At these prices the North Sea oil producers will be losing money on each barrel produced. Production is likely to be scaled down sharply and investment will drop to a trickle. Onshore jobs involved in both exploration and production (Norway, Holland, Scotland) must decrease. The Norwegian and Scottish production will bear the brunt of this turndown. Norway has built up a huge reserve fund and can weather a storm but not a permanent downturn, The UK economy can take the hit but an independent Scotland would be very hard hit. The introduction of shale fracking in England – which could take advantage of the the production cost reductions achieved in the US – could not only mitigate the risk but add a new source of jobs and tax revenue. The largest cost reductions in the production of oil from shale have come in the non-unionised part of the industry. There is considerable oil shale in Scotland as well, but I expect the SNP and the UK unions to be far too short-sighted and to do their damndest to prevent the introduction of fracking.

Nasdaq brent oil 10 year chart Aug 2015

Nasdaq brent oil 10 year chart Aug 2015

At less than $40/barrel, the SNP would need to create some very strange, fantasy budgets to prove the viability of an independent Scotland. Perhaps they could just nationalise everything and print money.

Oil down to $12/barrel? Unthinkable? Maybe not

August 18, 2015

When oil reached well over $100/barrel, the “peak oil”, Malthusian scenarios were dusted off and regurgitated ad nauseum.

Then came the drop in demand after the financial crisis and prices came back under $100 as reality set in. The disturbances of reduced production from Iraq, Libya and sanctions-hit Iran could not bring the price back up with demand as low as it was. Then came fracking and flooded the market with oil. Price came down to c. $60. Saudi Arabia did not decrease production but instead started a price war to kill of the nasty frackers and to maintain their market share. Prices should have dropped to less than $30 but stayed up above $50 on hopes of increased demand eventually coming through and hopes that China would get going again. Inventories have grown to record levels.

Oil inventory August 2015

Oil inventory August 2015

But now the hopes of a Chinese recovery anytime soon are beginning to dissipate. Prices have dropped below the psychologically important $50/barrel.

Business Insider: ….. WTI crude oil futures are trading near $42 a barrel while Brent futures are just above $48 a barrel.

And now the talk of oil prices below $20/ barrel, perhaps even as low as $12 are no longer looking ridiculous. David Kotok was talking to Bloomberg.

Oil prices have hit six-year lows, and Cumberland Advisors’ David Kotok thinks the worst may be yet to come.

We could go back to $15 or $20, this is a downward slope, we don’t know a bottom,” Kotok said in a Monday morning interview on Bloomberg TV. …….. 

Kotok said that despite the oil industries apparent belief that things will get better, there is little reason for anything to change.

Hope is not a strategy, it’s a myth,” he said. “The fact is, we don’t have the drivers.”

The good news is that there’s good news. When asked about the lack of an increase in consumer spending despite the more favorable oil and gas prices, he said it will come.

When the oil price goes down that means you get the first kick, but the you have to wait for the consumer to wake up and say ‘Gee, I’m going to have more money for longer, I’m going to spend it’,” Kotok said. I think that there is a huge boost in consumer spending coming when people begin to accept the fact that this is a permanent shift not a temporary shift.”

Some net oil consuming countries will get a “windfall” to help them kick-start their economies. But prices could stay down for a long time yet until a sustained, global consumer boom truly develops.

EC conditions for GE’s acquisition of Alstom will probably sacrifice Swiss jobs

August 14, 2015

UPDATE! 14th August

Reuters reports “exclusively” – and no doubt from anonymous EU bureaucrats as their sources – that the EC is set to approve the GE/ Alstom deal. The EC decision will be announced by 11th September. The report suggests that GE was prepared to accept the divestment of PSM and of a “facility” in Switzerland. That probably consists of some or all of the gas turbine R & D operations at Baden/Birr. The precise scope of the GE concessions are not yet revealed.

The French government, is probably not too perturbed by what happens to Swiss jobs or to PSM jobs in the US. And the price to be paid by Ansaldo probably compensates for most of the reduction that Alstom has accepted in the price to be paid by GE. In fact Alstom, the French government and Bouygues are all probably quite relieved to now see their way clear to financial closure.

Alstom management will also be quite glad to get rid of the difficult task of controlling “fortress” Baden. Whether GE for part, and the Italians or the Chinese for the rest, are up to that task is another matter.


Ansaldo (with Shanghai Electric) has emerged as the unlikely saviour of the gas turbine R & D tradition at Baden/Birr in Switzerland. But whether under GE ownership or in some hive-off to Ansaldo, it is only logical that many jobs in Switzerland would shift either to France or to Italy. One estimate puts the job losses to be expected in Baden to be around 600. I would expect the number to be very much larger. As far as the European Commision is concerned they may be making the calculation that more jobs will shift to Italy with Ansaldo ownership than would have shifted to France under GE ownership.

Job losses in Switzerland, of course, will not weigh very heavy with the EC in any case, and especially not if they were to shift to France or Italy. The EC may be calculating that Ansaldo could manage and run an R & D facility at Baden. I am not very optimistic about Ansaldo’s ability to be a technology owner. Shanghai Electric is more credible for that. My personal opinion is that Ansaldo has not the management strength or the R & D traditions to be able to manage an R&D program in Switzerland. (I note that even after a wholesale influx of French personnel, Alstom had its difficulties to manage Baden). On the other hand, any jobs which shift from the long and rich R & D traditions of Baden to Genoa will effectively be R & D which comes to an end. If the focus of development of an “Ansaldo” sequential combustion engine shifts to Italy, I would go so far as to forecast that it will never happen.

If this focus shifts to Shanghai instead, it will take a very long time but the development will eventually happen. With Shanghai Electric providing the “deep pockets” for Ansaldo, I suspect that jobs shifting to Italy will only be as a stop along the way to China.

HandelsZeitung:

Alstom Switzerland: 600 jobs in the balance

General Electric wants the energy division of Alstom.This could have a major impact on the Swiss workforce. Unions say that up to ten percent of the people have to go.

……. According to reports, GE will therefore sell its gas turbine business – the heart of Alstom Switzerland. The buyer would be the publicly listed energy company Ansaldo, a subsidiary of the Italian industrial group Finmeccanica. “Ansaldo is expected to shift the business to Genoa,” says a trade unionist. 

………… On 11 September, the Commission will announce a decision. “The closing of the deal in the second half of 2015 remains our goal,” said GE spokesman Bernd Eitel. 

For the EC, sacrificing Swiss jobs ostensibly for the benefit of any EU country is probably positive. But what about sacrificing Swiss jobs and an R & D tradition for the benefit of Shanghai?

Disclaimer: I should note that I own a few shares in GE and in Alstom but not enough to influence even my own opinions. I own no shares in “Baden” but I have a huge respect and admiration for the R & D work done at Baden as BBC and then as ABB and even later under Alstom ownership. Baden has been less impressive as a role-model for good management practice.

Could Ansaldo/ Shanghai Electric be the inheritors of Alstom’s sequential combustion gas turbine technology

July 30, 2015

There are reports that GE may have offered to sell off some of Alstom’s sequential combustion gas turbine technology to Ansaldo /Shanghai Electric:

PowerTechnology:

US-based General Electric (GE) has confirmed it is prepared to sell parts of Alstom’s gas turbine assets to Italian Ansaldo Energia in order to gain European Union approval for the proposed $17bn acquisition of Alstom’s power business.

Sources have been quoted by Bloomberg as saying that GE informed the EU that it is willing to divest some of Alstom’s sale and servicing activities to the Italian firm, along with certain intellectual property.

Alstom has also agreed to lower the prices of its energy assets to support GE’s efforts to win anti-trust clearance from the European authorities.

Even with Shanghai Electric’s deep pockets I don’t see that Ansaldo could come out with a sequential combustion engine in less than 5 years and perhaps not for a decade. Ansaldo does not have a tradition of breakthrough innovation and neither does Shanghai Electric. The current Ansaldo engines could not be easily modified to cater for sequential combustion. They would have to come out with a completely new machine. More importantly they would need new compressors for the higher pressure ratio that sequential combustion demands. And I don’t see either Ansaldo or Shanghai Electric developing – or even having the capability to develop –  a brand new compressor anytime soon.

However if the EC’s requirements are seen as helping the Chinese (via Ansaldo) gaining a clear foothold in Europe, the EC will not be very popular in France or even with Siemens. In fact this is the argument being used by the French government to urge the EC to approve the deal quickly.

In any event GE’s “remedies” must contain two elements I think

  1. a “sale” of some IP or of that IP being made open source – and this might well involve the sale of some IP to Ansaldo /Shanghai Electric,
  2. a divestment of some of Alstom’s service business and this could be either by a divestment of a small part (not more than 10 installed engines in my estimation) of the service business for Alstom’s GT26 (probably not GT24) fleet, or by a complete or partial divestment of Alstom’s service business for non-Alstom machines.

It is conceivable that Alstom (not GE) has agreed to exclude their subsidiary PSM from the GE deal and then to sell this unit to a 3rd party. But a buyer other than Ansaldo could probably pay much more for this unit which offers an entry into the US marketplace. I am not sure that GE would be party to allowing the Chinese into the US market place to service “GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine.”

Whatever actually transpires, the heavy duty gas turbine playing field is seeing upheavals of a kind not seen since ABB divested to Alstom in 2000. With a GT market cycle of 7-8 years, that was two market cycles ago. The next 2 decades (3 market cycles) will probably be dominated by an era of relatively low gas prices. A gas glut and a gas turbine boom could well see the market grow such that entry barriers are reduced and we may see some new players being able to break in.

Previous posts on Alstom/GE deal

Alstom and GE trim the scope of their deal by €300 million to ensure EC approval

July 29, 2015

The “remedies ” that GE has proposed to the European Commission to meet the EC’s concerns about their acquisition of Alstom’s power and grid businesses have not been disclosed. Now it has been announced that the Alstom Board has approved a reduction of €300 million in the sale price to GE. Since I suspect that GE’s proposed “remedies” are in two main areas (technology and service business), it would seem that the €300 million is made up of Alstom retaining some “balance sheet items” and some profitable business that will not, now, be transferred to GE.

Alstom shareholders will be looking at the numbers. Alstom has 309,419,350 shares with a nominal value of €7 each, giving a paid up share-capital of €2.165 billion. The current market cap is €8.22 billion with a share price of €26.6. The original deal with GE was for a sale price of €12.35 billion (€39.9 per share). This has now been reduced by just under €1 per share. Since the deal was originally announced Alstom agreed to pay a fine of €695.4 million ($772 million) to the US to settle past bribery charges. GE had also agreed to pay Alstom an additional €400 million for further, unspecified, commercial arrangements. Since the announcement of the deal therefore the Alstom shareholders have taken a net hit of €595 million (-695+400-300) or €1.9 per share. Estimates of what could finally be received by the shareholders varies between €3.2 and € 3.7 billion ( c. €10-12 per share).

Just as a number crunching exercise I assume that the €300 million reduction is made up of – say – €150 million of balance sheet items (assets to be retained by Alstom) and €150 million is for ongoing business (with a profit potential of about €15 million per year) which will remain in Alstom’s hands. If some of the assets to be retained are IP then their “value” will probably have to be written off by Alstom (as “goodwill”?). Whether Alstom can sell such IP to any other buyer (Shanghai/Ansaldo?, Doosan?) is doubtful but could be a little bonus for shareholders if it does transpire. If some real assets are retained, then presumably they could still generate some profit for Alstom. It occurs to me that a “smart” way out for GE could be with Alstom retaining PSM (Power Systems Mfg., LLC.) a wholly owned subsidiary. This unit is Alstom’s “pirate” company for performing service on non-Alstom machines. This might kill 2 birds with one stone. In 2000 Alstom lost its GE licence and acquired ABB’s gas turbine business. PSM was formed in 2000(?) and acquired by Alstom in 2007. As a “pirate” it is involved with the service of  GE Frame 6B, 7E/EA, 9E and 7FA machines, the Siemens/Westinghouse 501F (SGT6-5000F) engine and the Mitsubishi 501F engine. The loss of competition in the service business is one of the particular areas of concern for the EC. Moreover, GE does not really need PSM. It could well be that Alstom retaining PSM may provide the necessary concession regarding competition in the service business and the entire business may well have a value as an ongoing business of €150-200 million.

Such a solution would mean a much smaller hit for the Alstom shareholders since Alstom could probably continue with the this very self-contained business especially since it is not concerned with the Alstom range of Heavy Duty Gas Turbines. The profitability of this continuing business should not be much impaired by remaining in Alstom ownership. PSM should be “saleable” and could be quite attractive to an aspiring player.

Of course this is speculation, but perhaps Alstom shareholders need not be too despondent over the latest Alstom concession of €300 million. If most of that is due to the retention of PSM then the value of that ongoing and profitable business will not be lost.

Previous posts on the GE/ Alstom deal.

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.”

Bill Gates punctures the renewables fantasy balloon

June 29, 2015

I know that renewables provide a useful but limited resource for our energy needs. I know that they are economic only in some specialised niches in the energy sector. I dislike the distortion in the market caused by subsidies generally and power generation subsidies in particular. I “know” because I have worked within the energy sector including the renewables sector for some 40 years. I have made the calculations myself and I don’t rely on advocacy reports or alarmist scenarios. I have made the calculations of the various benefits accruing to the developers, the equipment manufacturers, the power plant owner/operators and the consumers. Grant subsidies allow the developers to make money at the cost of the consumer. Feed-in tariffs and tax breaks allow the owner/operator to make money at the cost of the consumer. Subsidies attract the “cowboy” developers and manufacturers who take their money and arrange a suitable bankruptcy at the appropriate time. If subsidies are reduced or removed, it is all too easy for the owner/operator to walk away without losses and without liability. It is consumers and the duped small investors who pay the cost.

I pay little attention to publicity hungry “personalities” who jump on the nearest fashionable, image enhancing band-wagon. I am highly suspicious of the rich and famous supporting “causes”, without any exercise of mind and primarily for the sake of publicity and image. I admire but don’t much care for Microsoft’s autocratic ways (and  I do use Windows) and see Bill Gates as extraordinary in his field but not as any kind of expert on energy matters. But he is a “personality” with a very valid claim to fame – in his area. So it is gratifying to read this report, even if it has no real impact on my views, at least as one example of a rich and famous “personality” who bothered to think.

The A-Register:

Retired software kingpin and richest man in the world Bill Gates has given his opinion that today’s renewable-energy technologies aren’t a viable solution for reducing CO2 levels, and governments should divert their green subsidies into R&D aimed at better answers.

Gates expressed his views in an interview given to the Financial Times yesterday, saying that the cost of using current renewables such as solar panels and windfarms to produce all or most power would be “beyond astronomical”. At present very little power comes from renewables: in the UK just 5.2 per cent, the majority of which is dubiously-green biofuel burning1 rather than renewable ‘leccy – and even so, energy bills have surged and will surge further as a result.

In Bill Gates’ view, the answer is for governments to divert the massive sums of money which are currently funnelled to renewables owners to R&D instead. This would offer a chance of developing low-carbon technologies which actually can keep the lights on in the real world.

“The only way you can get to the very positive scenario is by great innovation,” he told the pink ‘un. “Innovation really does bend the curve.”

Gates says he’ll personally put his money where his mouth is. He’s apparently invested $1bn of his own cash in low-carbon energy R&D already, and “over the next five years, there’s a good chance that will double,” he said.

The ex-software overlord stated that the Guardian‘s scheme of everyone refusing to invest in oil and gas companies would have “little impact”. He also poured scorn on another notion oft-touted as a way of making renewable energy more feasible, that of using batteries to store intermittent supplies from solar or wind. 

“There’s no battery technology that’s even close to allowing us to take all of our energy from renewables,” he said, pointing out – as we’ve noted on these pages before – that it’s necessary “to deal not only with the 24-hour cycle but also with long periods of time where it’s cloudy and you don’t have sun or you don’t have wind.” ……

I would go further of course. A low-carbon economy itself is nothing to aspire to unless it makes commercial sense. It does not now and will not for many years to come. It achieves nothing for climate but does increase costs, everywhere and particularly in the developing world where fossil fuels are needed most. In Europe, the obsession with renewables has delayed the financial recovery and has cost almost 20 million jobs.

Though Bill Gates does not qualify as an energy expert, he certainly does qualify as an influential investor. He even qualifies as an informed investor in the energy sector. So some little common sense from one of the very rich and famous to balance the irrational, do-gooding and sanctimonious mouthings of others is always welcome.


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