GE Will Take on Alstom Stakes in Energy Joint Ventures for $3.2B

GE will buy Alstom's stakes in three energy joint ventures (JVs) the companies formed when GE acquired Alstom's energy business nearly three years ago.

Alstom and GE on May 4 signed an agreement that essentially sets out a plan for Alstom to exercise put options on JVs it formed with GE pertaining to their renewables and grid businesses this September. That will automatically trigger GE to exercise a call option to buy Alstom's stake in a JV pertaining to the companies' nuclear and French steam power businesses. Alstom said in a statement that a transfer of all interests will then occur by October 2 for a total amount of $3.2 billion (a2.594 billion), an amount GE shaved off the purchase price when it acquired Alstom in November 2015. GE will then effectively have full financial control of all three JVs.

GE told POWER on May 16 that the deal will have a minimum effect on its business. "Regarding operations, GE has had operational control of these JVs since their inception. So there will be no change at all in operations, once the transaction is completed in October," said Jim Healy, a spokesperson for GE Europe.

France's Alstom was a formidable power equipment manufacturer and grid software solution provider before it officially sold its energy activities to GE in November 2015 in exchange for GE's rail signaling business.

As part of GE's acquisition of Alstom-and in part to appease the French government, which held a part of Alstom-the companies formed three JVs pertaining to grid technology, renewable energy, and global nuclear and French steam power, giving Alstom non-controlling interests, but also redemption rights that would require GE to purchase all of Alstom's interests within a three-year timeframe. Alstom in January 2018 informed GE that it intends to exercise redemption rights with respect to grid technology and the renewable energy JVs by September 2018, and with respect to the global nuclear and French steam power JV-in which the French government holds preferred interest (a "gold share")-in the first quarter of 2021.

GE noted that the "redemption price would generally be equal to Alstom's initial investment plus annual accretion of 3% for the grid technology and renewable energy joint ventures and plus annual accretion of 2% for the nuclear and French steam power joint venture, with potential upside sharing based on an EBITDA multiple."

At the time, the deal to acquire Alstom was expected to give GE a firm foothold in the burgeoning global energy equipment market, while reinforcing Alstom's positioning in the transport industry. Alstom is reportedly making headway. Last September, it signed an agreement with Siemens to merge the companies' rail operations.

Two years later, however, GE announced its finances were suffering, owing in part to the underperforming $10.1 billion investment in Alstom. The conglomerate has since moved to rejigger its power business and lean more heavily on other segments.

As POWER reported last week, GE, which has historically pioneered and led global gas turbine sales, has fallen behind Japan's Mitsubishi Hitachi Power Systems and Germany-based Siemens.

In a first quarter earnings call on April 20, GE CEO John Flannery said GE Power's outlook for new heavy-duty gas turbine orders in 2018 would need to be recalibrated. "With respect to Power, we came into the year expecting the overall market for new gas orders in 2018 to be 30 to 34 GW. Based on what we are seeing in the market, this is trending to less than 30 GW."

James Miller, GE senior vice president and chief financial officer, provided more dismal figures for GE Power's business: "This quarter our Power orders were $5.6 billion-down 29% with equipment, down 40% and services down 19%. In equipment, gas power systems orders were down 52%. Excluding distributed power reciprocating engines, [gas power systems] orders were down 71% on lower gas turbines, aero-derivatives and steam units. We received no orders for H units, which was in line with our plan. Steam power system orders were down 80% as a result of the non-repeat of two large orders in India last year."

The downturn can be pegged to energy efficiency, renewables penetrations, and some delays in orders, Flannery noted. Industry clearly has "excess capacity," he said. "Given what we are seeing, we believe the 2018 market is trending below 30 GW and we think this is the type of market that we are going to be looking at in general for the next few years."

The company so far has taken out $800 million of structural cost in 2017 along with $350 million more in the first quarter. Flannery said GE is on track to exceed its $1 billion target for 2018, noting that "headcount and sites are coming down."

The company is also maximizing the economics of its installed base and addressing quality issues it experienced last year. "The H-cycle time is down 20%. Ultimately our goal is to cut this another 50% or more," he said.

-Sonal Patelis a POWER associate editor (@sonalcpatel, @POWERmagazine)

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