NEW YORK (TheStreet) -- General Electric's (GE) - Get Report revised offer for Alstom's energy and transportation businesses includes an array of joint ventures, asset transfers and sales. The new deal could also lay the foundation for further joint ventures in France and Africa as the conglomerate giant seeks to grow its industrial business in coming years.
On Thursday, GE said its revised offer to Alston would include three joint ventures: a combination of both companies grid assets, a renewable energy venture based in France, and a nuclear and steam alliance that gives governance rights to the French government. Additionally, GE will sell its rail signaling business to Alstom and create a special purpose vehicle to house the patents from Alstom's nuclear steam turbines.
All of these joint ventures and asset sales will slightly complicate GE's initial Alstom offer, however, they may be the necessary concessions to push forward the deal.
"I think this was GE's deal from the beginning," Russell Solomon, lead analyst for GE at Moody's Investor Service, said of the revised deal in a Thursday telephone interview.
"We were not expecting the company to offer more cash proceeds and it does not appear to be going that route. From a credit perspective that is a good thing," he added.
It is still to be seen what the final purchase price of Alstom's energy and transportation businesses will be, given the flurry of joint ventures and asset transfers that are now part of the transaction.
Nick Heymann, an analyst with William Blair estimates that GE's revised offer is likely to lead to a $4 billion-to-$5 billion adjustment to the purchase price, or a 25%-to-30% reduction in the cash component of GE's initial offer. Heymann said in a telephone interview the revised offer could reduce the earnings accretion of the initial transaction, however, a lot will rest upon whether GE or Alstom manage the businesses.
The nuclear joint venture and patent special purpose vehicle may solve French national security concerns surrounding the sale of Alstom's nuclear businesses. Meanwhile, GE's sale of its signaling business to Alstom may add incentive for the transaction forward. Alstom would be acquiring a business that generates about $200 million a year in earnings before interest, taxes, depreciation and amortization, and could help the French conglomerate support its rail business.
"The element that seals the deal is the ability to sell GE's signaling business to Alstom," Heymann said.
"[W]e have reached agreements with Alstom's management that will create an alliance between our companies in both spirit and practice. The alliance will retain and strengthen France's presence in the energy business and reinforce Alstom Transport," GE CEO Jeff Immelt said on Thursday.
New Strategic Rationale
Were the deal to now move forward, it could wind up strengthening ties between GE and France, possibly opening the company to new business in Europe and Africa.
Heymann said on Thursday he believes GE could use its Alstom businesses to earn new industrial and infrastructure in France and former French colonies. One precedent for GE's expansion in France is the company's aviation joint venture with Snecma called CFM, which relied upon the company's financial services businesses.
In that deal, GE has both developing engines for commercial and military aircrafts and provided financing for the venture. According to Heymann, it is one of GE's best ventures.
Were similar aviation, industrial and water treatment projects to arise in France and Africa in the wake of the Alstom deal, it could underscore the impetus for Thursday's revised offer.
Work Left To Do
Even if GE succeeds in winning Alstom, the company's post-financial crisis transformation under CEO Jeff Imment remains incomplete.
Barclays, when reacting to GE's initial offer, said Alstom is the type of depressed asset that could be quickly fixed by GE. Analyst Scott Davis also said in an April 30 client note, GE still has work to do if it wants to win over stock investors. In particular, Davis recommended GE exit all of its non-core or disadvantages businesses such as appliances and lighting.
Were GE to successfully exit those low margin businesses and move forward with the spinoff of its consumer credit card business, Synchrony Financial, it could further illustrate the company's return to its industrial roots.
"We'd be disappointed if GE views this deal and a favorable stock reaction this week to mean that it should stop re-focusing efforts," Davis said in April. "Spin-offs, sales, JVs for non-core assets should still be on the table. We believe that they are," he concluded.
GE shares rose less than 1% in Thursday trading. Shares have fallen nearly 4% year-to-date, but have gained over 14% over the past 12-months, excluding dividend payments.
-- Written by Antoine Gara in New York.