An executive at Alstom, the French train and turbine maker that has been the object of a lengthy and high-profile bidding war by rival foreign businesses ending in a deal with American firm General Electric, is quite candid. “When I saw [economy minister Arnaud] Montebourg take charge of the case, I told myself we were heading for disaster. But on Friday [June 20th] when I discovered what the agreement was, I conceded that he'd done a good job,” admits the executive, who does not hide his preference for liberal economic policies. “First of all, the good news is that Alstom will not be in partnership with [German firm] Siemens, which would have led to a jobs massacre in the group, but rather with GE. And then it has to be said that the agreement that Montebourg has obtained is better than the outright sale planned at the beginning, even if some aspects remain to be clarified.”
It has certainly been an important episode for Montebourg. Having been criticised for his failure over the steelworks at Florange in north-east France – which he wanted to nationalise – mocked for his dyed-in-the-wool interventionism and described by his critics as the minister for bragging and tilting at windmills, Arnaud Montebourg has just made a crucial political point with his handling of the Alstom case. The embarrassed reaction from the Right, who expected him to get his comeuppance over this emblematic case that was so dear to the heart of former president Nicolas Sarkozy, and the irritation at an Elysée eager to let it be known it was the president's office that made the final decision, imposing the choice of GE on Arnaud Montebourg who himself preferred the rival joint bid by Siemens and Japanese firm Mitsubishi, show the extent to which the minister's political lesson has caused annoyance. Montebourg's success in brokering the deal has wider implications than just his own political fortunes. With the support of prime minister Manuel Valls, and faced with a wavering Elysée, the economy minister has shown that there is still place for an industrial policy and that the state need not always remain powerless.
Enlargement : Illustration 1
Yet at one time the Alstom case looked hopeless. When on April 23rd the government discovered via a news report from business news agency Bloomberg that Alstom planne to sell its energy business to GE, it seemed a done deal. The sale was due to be approved by Alstom's board just five days later. But in the space of a few days Montebourg managed to put his foot in the door and prevent an outright sale. He spoke out publicly, made it clear that the French state had a role to play, looked for the legal means to influence the outcome and tried to give himself room for manoeuvre and time to negotiate.
During this crucial period it was to Montebourg's advantage that his office already knew the Alstom file well; back in February the minister had asked the consultancy firm Roland Berger to prepare a report on the major French group. This meant he was quickly able to examine other possible solutions. Alstom's competitor Siemens soon let it be known that it, too, wanted to look at the case, and Montebourg immediately seized on the opportunity.
Nonetheless, it was not until June 16th that the German group, in alliance with Japan's Mitsubishi, made a formal offer. But the presence of these rivals in the wings had an impact on the negotiations with GE. During this time Montebourg's office raised the stakes and asked for more and more concessions from the US firm. Prime minister Valls supported the minister's attempts, and on May 14th signed a decree that followed the American model in ensuring that the sale of strategic interests in the areas of energy, transport or defence to foreign bidders needed the authorization of the French state.
“Alstom would have been sold without conditions to General Electric several months ago if we hadn't intervened,” said Manuel Valls at the moment the deal was finally struck, as he highlighted the essential role of Arnaud Montebourg in the affair. The deal of June 20th is indeed very different from the original agreement, which would have meant Alstom abandoning its energy business completely in return for a large cheque. That would have led to the dismantling of the French group.
Arnaud Montebourg was not able to prevent the inevitable; a large section of Alstom will now pass into GE's control. The American group is buying the gas and steam turbine business, which is by far the most important part of Alstom's portfolio – it has a captive clientèle and guarantees maintenance contracts over very long periods. The US outfit will also take complete control over some of Alstom's renewable energies portfolio, such as land-based wind farms, solar energy and geothermal energy.
But the American firm has agreed to set up three 50-50 shared ventures with Alstom in relation to power grids, some renewable energies – including in hydroelectric power in which Alstom is the world leader – and steam turbines used in the nuclear industry. GE has even agreed that this last venture should feature a preferred or golden share for the French state, giving it a right of veto over this sensitive issue and allowing France to keep control of the entirety of its nuclear industry. These joint ventures represent a turnover of around 6.5 billion euros.
The US giant has also committed itself to maintaining four commercial sites in France and to creating 1,000 jobs in France in three years, with a penalty of 50,000 euros for each job not created in that time frame. After a great deal of haggling, the state has also persuaded GE to sell its railway signal business to Alstom. Finally, the French government is to take a 20% stake in Alstom.
The unions at Alstom have raised numerous questions about the way this deal will be put into practice, for the agreement appears complex and open to interpretation. But the deal provides hope that the French group still has a future in the industry, and certainly a more certain future than it would have had if the entire energy business had simply been sold to GE as initially planned.
As a result of the final deal Alstom will receive less money that previously envisaged; 7.3 billion euros in cash rather than 12.3 billion. But in share terms the way the deal has been structured puts a higher value on Alstom than the outright sale of the energy business would have done. And the agreement strengthen the foundations of the Alstom group which, if reduced just to its railway arm, would have been doomed to be sold sooner or later. Even if the energy business is now reduced to just a quarter of its previous size, Alstom maintains a valuable toehold in small-scale activities that could be very fruitful in the future. Moreover, France keeps its hands on some key technology to help carry out the energy transition it is committed to.
Could the French government have obtained more? For example, could it have kept the whole of Alstom as a French group as demanded by the CGT trade union, which wanted the firm nationalised? Lacking both time and money, this would have been difficult to achieve, though it is something that could have been negotiated calmly in secret if the sale had not been carried out in such a rush. Some analysts, for example in The Wall Street Journal, believe that GE's chief executive officer Jeffrey Immelt gave too much away to the French state, depriving the firm of synergies – in other words cutting jobs and shutting down sites – that such an acquisition can often bring.
Power struggle
If GE's boss was strongly committed to this deal and ready to accept significant compromises, and if the German group Siemens and Japan's Mitsubishi made an offer, this was not done as a favour to Arnaud Montebourg, to help him to look good and join in his game of raising the stakes. They were simply all very interested in Alstom's energy business.
The large-scale energy manufacturing sector is dominated by a few major players. Since the disappearance of the American firm Westinghouse and the withdrawal of Swedish firm ABB (though it remains the world leader in power grids), four large groups from the West have shared the market: GE, Mitsubishi, Siemens and Alstom. Today all feel threatened by the potential emergence of a new competitor, especially from China. In this new situation Alstom's energy business, even if it lacks critical mass in some areas, and even if it is suffering from the slowdown in the European energy market, has real industrial, commercial and technical value. All its competitors are interested in its customers, economies of scale, and winning market share.
One just has to look at the offers from the rival bidders to realise Alstom's appeal. GE was ready to go a long way to take over the French group in order to strengthen its industrial position and its place in the European marketplace, where it feels it lacks presence. Siemens wanted to buy Alstom's gas turbines in order to block its American competitor in that same market. The Japanese company Mitsubishi – whose offer would have been by far the most promising had they had time to develop it – offered a real alliance across the various sectors of the French group.
Alstom's energy business has such value that Joe Kaesar, Siemens's chief executive officer, said on Sunday June 22nd, even after the GE deal was agreed and approved: “We are still open for talks. The doors are open for Alstom and the French government. It is not over yet.” In doing so he was apparently foreseeing difficulties in the carrying out of the GE agreement. The new arrangements involving the American firm and Alstom should be in place by January 1st, 2015, if all goes well, say the two sides.
The paradox here is that it was the French government that chose to exploit this power struggle between bidders and make the most of it to extract the best possible deal to defend the French group. Why didn't Alstom's management try to do this earlier? Was the group in greater difficulty that it has admitted, forcing it to hasten the sale of its business and to opt for the biggest cheque rather than envisaging a more complex future with a partnership? Are there other reasons?
At no time during the discussions did the heads of any of these major engineering groups looking to clinch a deal oppose the intervention of the French government. Unlike Alstom's chief executive Patrick Kron, who did not think it necessary to tell the government in advance of the company's plans to sell parts of the group, the other bosses recognised the right of the state to have its say in such cases. They understand the importance of the efforts made by the French state over several decades to safeguard this industry, and that the strategic nature of the nuclear industry in France imposes yet further demands on the government to keep a close eye on developments. “It's only normal that the public authorities defend France's strategic interests,” GE's Jeffrey Immelt said during his first visit to the Elysée during the GE-Alstom saga. For its part, when Siemens learnt of the final deal it said in a statement that the company “understand[s] the political interest of the government in the field of energy technology...the safeguarding of national interests is a matter for the state”.
Here again, the understanding attitude shown by these major players is not simply intended to curry favour with the government. These large groups live permanently at close quarters with public authorities. All of them lean on their own governments, on their country's diplomatic service, to win big export contracts. They all live on public contracts, Alstom included. Over and above strategic matters, none of them wants to fall out with these large customers. It is not just in France that it is considered normal to revile public authorities while at the same time asking them for orders and subsidies.
In fact, Mitsubishi went even further. In its proposal it asked for the French state to come on board and take a 40% stake in the three joint ventures that it was suggesting, with the aim of building an alliance on the lines of that which exists between car makers Renault and Nissan. From the start of the talks Montebourg's office worked on setting up joint ventures with GE based on the model of GE's existing cooperation with French firm Safran to build CFM jet engines. The American group, which has been happy with that alliance for 40 years, raised no objections to repeating the model. But the approach of the Japanese group allowed Arnaud Montebourg to take full advantage: he asked the American group to fall into line with the Japanese proposals and allow the French state to take a stake in Alstom.
On the evening of Thursday June 19th the Elysée finally gave its agreement to the state taking a stake in the Alstom group, on condition that the firm's current major shareholder, French firm Bouygues, agreed to sell its 20% share. According to Arnaud Montebourg this move allowed them to achieve two objectives at the same time: they could consolidate the shareholding of the company and keep an eye on its future while at the same time allowing Bouygues, which has its own problems in the mobile phone sector, to free itself from Alstom. The agreement on the share deal was reached on Sunday evening, after some fierce discussions. Time will tell who comes best out of the share deal.
The state's decision to take a stake in Alstom has caused something of a stir among economic liberals. Action that was regarded as legitimate in the days of Nicolas Sarkozy – who as finance minister oversaw the rescue of Alstom in 2004 even though as is clear today it clearly did not solve the group's big industrial and strategic issues – has become wrong as a matter of principle simply because it is being carried by François Hollande's government. “Keeping Arnaud Montebourg in the government costs 2 billion euros,” mocked leader writer Yves Thréard in the right-leaning Le Figaro, in reference to reports that the minister had been on the verge of quitting office and to the estimated cost of buying the stake in Alstom. Other commentators have spoken critically of another “French exception”.
The irritation is palpable. For French business bosses the discussions over Alstom, the agreement struck between GE and the state, are a terrible example. They are contrary to everything that they advocate; the systematic rolling back of the state, submission to the market, a defeatism that proclaims with certainty that there is no alternative.
An advisor in Montebourg's office is, meanwhile, angered by the behaviour of Alstom's boss. “Patrick Kron...there's a compromise of integrity. He treated the government with disdain. He said to the Americans: 'You save me from accusations of corruption and I'll give you Alstom',” says the advisor. In the corridors of Alstom itself there have been rumours for two months that Kron is about to head off to the pharmaceutical group Sanofi, leaving it to the head of Alstom's railways business Henri Poupart-Lafarge – son of the former powerful finance director of Bouygues Olivier Poupart-Lafarge – the job of dealing with the aftermath of the agreement. Without spelling it out, Patrick Kron has indicated several times that he was going to hand over the presidency of the group after the conclusion of the agreements. This can only create a climate of fatality and a sense of abandonment within the group.
After two years of isolation and failures, the economy minister Arnaud Montebourg has finally managed to show that there are alternatives. Even if they are rickety and outlandish, they demonstrate a real refusal to succumb to fatalism and abdication. And one can describe that as a political victory.
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- The French version of this article can be found here.
English version by Michael Streeter