Just hours before the board of French engineering giant Alstom was due to meet on Sunday to discuss a 12.7 billion-dollar (10 billion-euro) offer by US conglomerate General Electric (GE) for the struggling French firm's energy division, German engineering and electronics corporation Siemens weighed in with a counter-offer that gave the French government a welcomed Plan B.
Siemens derailed its American rival’s bid by offering an asset swap with Alstom. Under its proposal, Siemens would take over Alstom’s energy activities, including power turbines, thermal power plants, hydro-electric equipment, renewable energies and grid equipment, all of which represents 70% of Alstom’s industrial structure, while the German firm would hand Alstom a part of its railway engineering activities (production of high-speed trains, locomotives and tramways) in order to bolster the French firm’s remaining sector of activity. Furthermore, Siemens would compensate the French firm for the asset shortfall of the deal with a cash payment.
Enlargement : Illustration 1
The rapid reaction of Siemens towards what appeared a likely takeover of Alstom by GE says much about what’s at stake over the French firm’s future. The German group cannot allow its arch US rival to take a major lead in the strategic energy sector within in its own backyard, namely Europe. Up against difficulties of its own, Siemens has now offered its French competitor, with who it has long been in commercial combat, a sort of ‘peace of the brave’.
Until now, Alstom has always excluded any deal with Siemens. A rapprochement of the two companies’ energy divisions, which overlap each other, will entail costly social and industrial consequences. Alstom employs around 18,000 people in France, representing about a fifth of its total workforce.
GE's French operations already employ10,000 workers locally, while Siemens' French workforce amounts to 7,000. Siemens has offered to guarantee no job losses at Alstom during the first three years following a deal concluded with the French firm.
The government PR machine is underway since the Siemens offer emerged on Saturday, with talk of a new ‘energy and transport Airbus’, a reference to the multi-national industrial cooperation behind the European plane-maker. The French government is ready to champion the Siemens offer in which it sees an honourable political get-out. In the wake of Siemens’ offer, French economy and industry minister Arnaud Montebourg postponed at the last minute his planned meeting on Sunday with GE board chairman and CEO Jeff Immelt to discuss the American group’s bid. "GE and Alstom have their calendar, which is that of shareholders, but the French government has its own, which is that of economic sovereignty," haughty Montebourg said in a statement. He said that a deal with Siemens was "about creating two European and global champions in the energy and transport domains - one around Siemens, the other around Alstom".
On Monday, French President François Hollande and Montebourg held separate meetings with GE boss Jeff Immelt and Siemens CEO Joe Kaeser to discuss their offers. Trading of Alstom shares was suspended on Friday until Wednesday at the request of market regulator AMF.
“The government is tetanised,” said one source close to the negotiations at the weekend, speaking on condition of anonymity. “After PSA, after Lafarge, after Publicis, the loss of Alstom is an absolute catastrophe for them. The Right will not miss the opportunity of accusing them of losing one of the family jewels, saved ten years ago by Nicolas Sarkozy. In fact, [the government] is not responsible. It has inherited a difficult situation. It has no means and is not even a shareholder. The only thing that it can be accused of is not seeing what was coming.”
It was on April 23rd that the government was alerted to the situation when a Bloomberg news agency report revealed GE’s moves for Alstom. However, alarming rumours about the instability of Alstom had been circulating for weeks, centring on its urgent need to raise capital and the impossibility for Bouygues, its principle shareholder (at 29%), to meet the requirements given its own difficulties with the recent shakeup of the French mobile phone market.
As of last autumn, Alstom CEO Patrick Kron had recognised the difficulties. In November, when the firm’s half-year results were published (Alstom has a non-calendar financial year, running from March 1st to the end of February), it reported a 22% fall in its half-yearly turnover, down to 9.3 billion euros. Its debts had risen from 2.8 billion euros to 3.2 billion euros, and the firm posted a negative free cash flow of 511 million euros. In his letter to shareholders, Kron announced a new cost-cutting drive and the disposal of assets to the tune of between 1 billion euros and 2 billion euros. He added that he hoped for a stabilisation of the European energy market which had become so depressed that no major contracts or projects were being signed.
It is the collapse of the European energy market, the principle one for Alstom, which was the main cause for the difficulties in which the French firm’s energy division had found itself. The market had become totally thrown out of joint by the European Union’s energy policies, which had the single aim of an un-channelled liberalisation (while including, for good measure, support for renewable). As a result, the European energy market suffers from the absence of a coherent line and a chronic under-investment in its production capacity and its networks – while at the same time making electricity supply ever more expensive.
The economic crisis that has now lasted five years has only darkened the picture. For the first time in decades, electricity consumption has fallen, not because of energy savings but because of the drop in economic activity. This collapse is illustrated in the results of Europe’s main electricity producers. All of them, like Italy’s Enel, Germany’s RWE and France’s GDF Suez, have announced a depreciation of assets amounting to billions of euros, leading to the closure or mothballing of production, notably concerning gas-fired power stations, and the cancellation of investment projects.
The legacy of Alstom's 2003 bailout
Energy equipment-makers are naturally held down by the problems of their clients. The difficulties that they all face are illustrated by the ‘palace coup’ within Siemens with the ousting of former chief executive Peter Löscher in July last year, and the recent lightening visit to Moscow of his successor, current boss Joe Kaeser, keen to assure the firm’s good business relations with the Russians when the US and EU established the first sanctions against Russia over its role in Ukraine.
Smaller and technologically less advanced than Siemens, Alstom was particularly hard-hit by the problems of the European energy market, which now represents 35% of its turnover against 40% previously. Over the past year, the only contracts it found on the continent involve maintenance and the upgrading of its equipment already sold. What’s more, amid a fierce price war, the contracts were at bargain-basement rates.
Alstom tried to compensate on other markets, but there too it encountered problems. It has a longstanding activity with China, beginning in the mid-1970s, where it created a joint-venture for the production of turbines and coal-fired power stations. But the huge economic expansion in China is also slowed, with major projects abandoned as Beijing tightens credit supply in an attempt to check the gigantic financial bubble that began in 2009.
Enlargement : Illustration 2
Alstom tried selling its turbines and thermal power stations in other emerging countries, notably in Central and South America. But the strengthening of the euro against the dollar – a rise of almost 10% in one year – added to its difficulties, while it has no significant technological advance over its competitors nor the help of the diplomatic clout that GE can call upon when needed. The economic crisis that began earlier this year in the emerging economies, a knock-on effect of the US Federal Reserve’s monetary policies, added more cold water on Alstom’s hopes, as the governments of Brazil, South Africa, Turkey and Mexico battle with the flight of foreign capital from their countries. Their weapon is a rise in interest rates, producing a brake on industrial activity with the energy equipment sector among the worst-affected.
Added to all these problems, Alstom has an additional handicap in its lack of sufficient financial resources to support what are capital-devouring production activities that involve a very lengthy return on investment.
“In a way, Alstom never recovered from its bankruptcy in 2003,” said one source close to the current dealings. The firm’s near-collapse in 2003 was the original sin of its separation from electronics and telecommunications company Alcatel in 1999. During the separation of the Alcatel Alstom group its principle shareholders – namely Alcatel and Britain’s GEC – demanded the payment of an exceptional dividend of 5 billion euros. That left the newly-independent Alstom undercapitalized and, following its disastrous purchase of design-flawed gas turbines from Swiss-based group ABB, with enormous financial, legal and technical problems.
As the French firm recounts on its website: “The downward spiral in which Alstom finds itself in 2003 dates back to the turn of the 21st century, when serious design flaws affecting the gas turbines recently acquired from ABB led to considerable commercial and financial difficulties. Problems in contract execution, notably in rail transport, and the bankruptcy of a major customer of the company’s shipyards worsen the financial drain. This is compounded by a lack of confidence among customers, suppliers and bankers, and even among employees, as to the company's ability to stay the course — a disastrous situation for a long-term business like Alstom's. In 2003/2004, the Group’s order book shrinks to one year of sales, far below the usual backlog of two to three years. Net losses total over €1 billion in FY 2002/03, followed by a loss of €1.8 billion in 2003/04. Debt reaches €5 billion and the losses wipe out the company’s capital. Alstom is on the edge of the abyss. Most observers feel its fate is sealed.”
Nicolas Sarkozy, who in 2003 was French finance minister, rushed to the rescue. The French state took a 31% holding in the firm’s capital, bringing with it 2.8 billion euros. The subsequent turnaround was spectacular, and in 2006 the French state sold its stake to civil engineering and telecommunications group Bouygues, for an added value of 1.26 billion euros.
But the state’s withdrawal from Alstom occurred without any increase in the firm’s capital, and its financial structure remained fragile, with just 4.5 billion euros – insufficient to fund its different activities. According to various current estimations, Alstom now needs an extra capital support of between 3 billion euros and 4 billion euros, about the same amount as its own funds.
There has never been any move to increase them, and the question is raised as to whether this was because Bouygues could not have supported the process. Bouygues CEO Martin Bouygues, who has excellent relations with Alstom boss Patrick Kron and in whose management he appears to have total confidence, is not however likely to be against diluting the financial resources of his group if he was convinced of the pertinence of the project.
When his group entered Alstom, Martin Bouygues eyed an eventual partnership between the firm and French nuclear technology company Areva, which makes nuclear boilers. Such a rapprochement was fiercely opposed by Areva boss Anne Lauvergeon, who had just as fiercely argued against the 2003 bailout of Alstom - even attacking the plan before the European Commission.
'GE is on a hunt for acquisitions'
The mooted idea of a tie-up between Alstom and Areva reignited the conflict between Lauvergeon and Kron, who was appointed Chairman and CEO of Alstom in March 2003. For months, the French media relayed the war of words between the two, while the French government kept on the sidelines. Finally, in 2010, Sakozy, then president, ruled that no such partnership should take place. But by then Bouygues and Alstom had in any case decided to abandon the idea, for by then Areva was in deep difficulties with the progress of its EPR (nuclear reactors) and, given doubts over its financial accounts, they were anything but keen to take a stake in the company.
But during the battle with Lauvergeon, Kron had received propositions from Japan’s Hitachi and Mitsubishi, whose struggling energy divisions were seeking alliances in the production of electric equipment and power stations. “Did Patrick Kron overestimate the difficulties of the Japanese?” asked Mediapart’s source, previously cited. “Did he not believe in this alliance? I don’t know all the facts of the case, but with hindsight one wonders if he hadn’t let an opportunity for the group to pass by. No doubt he thought he had time on his side. But he didn’t. The acceleration [of events] is impressive.”
Up until this February, Kron thought there was a way out for Alstom on its own. In September last year, it managed to raise 500 million euros in debt financing. In February, he announced Alstom may use a stock market listing to sell a stake (between 20% to 30%) of its rail transport equipment activities. But, very soon after, the difficulties led to the door of GE, with whom Kron began discretely discussing a deal over the past few weeks. “It is a desperate move on his part,” commented a banking source, speaking on condition of anonymity. “To be reduced to that, it means that he could not see any other way out than sacrificing his energy division.”
Did Kron reach that point because the difficulties in emerging economies offered no alternative to the fall off in activity in Europe, or was it because of the advice by bankers that a partial listing of the rail equipment branch would be difficult, even impossible, in the current climate? Or was it because of a discreet withdrawal of support by the banks? Probably all of these factors were involved. Last Thursday there was another nail in the coffin when ratings agency Standard & Poor’s announced a mark-down in Alstom’s credit rating to BBB-, which sits just above the level of junk bonds.
The list of potential buyers for Alstom’s energy division is a short one. This high-technology and highly competitive market involves about ten corporations worldwide, with Siemens at the top of the pile. But profound past antagonisms between Alstom and Siemens made a relation of confidence all but impossible, while Alstom’s management also believed the social and industrial costs of a deal with the German group would be prohibitive.
Enlargement : Illustration 3
Which is why Kron went to GE. With its industrial and technological know-how, and a formidable financial warchest, helped by the billions of dollars that the US Federal reserve has freely distributed to banks, including its own, helped by the ever-falling exchange rate of the dollar and benefitting from the discreet support of the US authorities who have always assured it of their influence where required, GE appears all-powerful.
The US giant has for some while shown a keen interest in the French market. But according to some observers, GE is no longer in the same spirit of industrial cooperation, as in the joint project with France’s aircraft engine manufacturer SNECMA (now Safran) to build the CFM56 family of turbofan engines. Today, it is eyeing acquisitions, as witnessed by its 2012 buy-up of Italian aerospace company Avio after sidelining Safran. “GE has money,” commented one business insider, speaking on condition of anonymity. "It is engaged on a hunt for acquisitions. It is making best of France’s industrial, economic and diplomatic collapse to shop around.”
Payback time after bleeding French industry for decades
Those close to the current negotiations have no illsuions about the future, whoever buys up Alstom’s energy division. It is not the French firm’s technology or know-how that is of interest to them, even if Alstom has a lead in some fields, notably coal-fired power stations. What is of interest is Alstom’s market share and its customer base: the maintenance of equipment already sold and installed is a long-term activity over several decades and promises a recurrent turnover. The sale places Alstom’s decision-making centres, the R&D branches and industrial plants at the edge of the cliff of sacrifice that is made in the name of harmonization and profit.
Enlargement : Illustration 4
French economy minister Arnaud Montebourg and his advisors have well understood the danger, and over recent days have sought alternative solutions. Areva’s name reappeared, but was quickly dismissed. As Mediapart’s banking source put it: “Areva is bankrupt, even if that’s not said. To drive an alliance with Alstom would mean telling the truth about the accounts, about EPR, about UraMin. Areva would need to be refloated before refloating Alstom. At a time when the state is looking to make 50 billion euros of savings, it doen’t have the means to give 4 billion.”
The same is true of the French public investment bank, Bpifrance, which funds companies and their development. Already called upon to help struggling French carmaker PSA, it has little left in its coffers for Alstom, and could only be a part player in any rescue package for the firm. Furthermore, even if Bouygues accepted to take part in raising capital, there are no other shareholders ready to follow. Once again, the question is raised as to where are the 1,500 billion euros of savings that the French people have placed with the banks? They are not supposed to be either in state bonds – more than 75% of French debt is in foreign hands, above all in tax-haven subsidiaries of French banks - nor in the shares of companies quoted on the CAC 40, the benchmark French stock market index where, officially, foreign investors account for more than 50% of capital.
The state, no longer a shareholder, had neither the means nor partners with which to intervene to ward off a takeover by GE. But then along came the ‘divine surprise’ of Siemens’ move and, while everything has yet to play out, it is certain that the French and German governments will do all in their power to help broker that deal. For the sale of Alstom’s energy division to GE would amount to a major industrial destabilization for Siemens, and a political one for the French government. Alstom will receive every help it might need in concluding an agreement with Siemens, and will meet with every difficulty if it doesn’t.
“Alstom is strategic from an industrial point of view,” commented Jean-Claude Mailly, head of the FO trades union, the third-largest in France, in an interview about the sale of Alstom’s energy division on Sunday. “It would not be abnormal for the state to intervene including by taking a share in the capital. The state could, for example, buy up Bouygue’s stake. We have never been frightened by nationalisation, including if it must be of a temporary nature.” France’s socialist government faces a dilemma in explaining why it has excluded this possibility, whereas it was a conservative government that had no hesitation in using it as a solution for saving Alstom 11 years ago. But the lines here too are becoming smudged as the tension mounts: while budgetary discipline has been cited as an obstacle to the state taking a share of Alstom’s capital, the government is now talking of its openness to listen to all possible cooperation projects.
While a deal with Siemens is dressed up by government as an honourable solution to Alstom’s woes, it is clear that if Germany has intervened in the affair it is because its strategic interests are at stake. Otherwise, Alstom’s fate would have been of no interest to it, while the French government, hand and feet tied, would have been reduced to acting as a trustee in bankruptcy, with speech-making its only weapon.
The current situation is the result of a crippling legacy. For the past 20 years, French industry has suffered an unprecedented disarming of its technological and financial resources, and its shareholder structures. Over such a lengthy period, the recurrent waves of erosion have been passed off as negligible. But there is always a payback time, and for Alstom that moment is now.
-------------------------
- The French version of this article can be found here.
English version by Graham Tearse