The k2p blog

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.