Bloomberg News

GE’s Immelt Pursuing Biggest Deal in Bid to Boost Growth

April 24, 2014

General Electric Co. CEO Jeffrey Immelt

General Electric Co. Chief Executive Officer Jeffrey Immelt. Photographer: David Paul Morris/Bloomberg

Buying Alstom SA (ALO) would be Jeffrey Immelt’s biggest attempt yet to reverse a 35 percent slump in General Electric Co. (GE:US)’s shares on his watch as sales growth languishes.

GE is in discussions to pay more than $13 billion for the French builder of trains and power plants, according to people with knowledge of the talks. That would break with Immelt’s history as chief executive officer of sticking to deals that rarely top $5 billion.

The deal may include only Alstom’s energy assets and not the unit that builds the TGV trains, a move that could help GE obtain approval from the French government, one of the people said. The non-transportation assets account for about 73 percent of Alstom’s sales.

By pursuing Alstom, whose shares have dropped by 20 percent in the past year, Immelt is making a bet on a region slowly beginning to revive. Alstom would help Immelt in his drive to return the company that invented the lightbulb to its industrial roots, lessening its reliance on financial services.

“GE’s shareholders would certainly be excited about the continued shift to favor industrial businesses,” said Nicholas Heymann, a New York-based analyst at William Blair & Co. The concern is, “how fast would GE be able to transform the Alstom portfolio to be able to operate at the kind of standards that GE is driving toward.”

GE declined to comment.

Immelt’s Recalibration

Immelt, 58, who took over from Jack Welch in 2001, has been recalibrating the company by focusing on units that make oil pumps, jet engines and locomotives, moving away from more volatile businesses like mortgage lending that threatened to imperil GE during the financial crisis.

The moves are aimed at reversing GE’s lackluster share performance under his tenure. The stock has fallen 35 percent since Immelt took the reins while the Standard & Poor’s 500 Index is up 70 percent. GE slid 0.6 percent to $26.27 at 9:46 a.m. in New York.

Related:

  • GE Said in Talks to Buy France’s Alstom for $13 Billion
  • GE’s $57 Billion Cash Overseas Said to Fuel Alstom Deal

As Immelt attempts to boost the share of earnings coming from industrial divisions, which accounted for 53 percent of the company’s profit last year, he has put GE’s cash to use on acquisitions, including buying Lufkin Industries Inc. last year for $3.3 billion.

‘Smart Way’

“He’s been under pressure from day one,” said Michael Holland, who oversees more than $4 billion including GE shares as chairman of Holland & Co. in New York. “He’s made acquisitions in areas where it looks to me that are profitable places for the future, particularly in the industrial area and the energy area. My guess is he’s adding to that portfolio in a smart way yet again.”

Alstom’s stock decline means GE may be getting it at a bargain price, Holland said. In March, Alstom dropped to 7.46 times its earnings over the last 12 months, the lowest multiple on record for the company, according to data compiled by Bloomberg.

Though there are signs of recovery, the euro-area economy is seen continuing to lag behind the U.S. and China this year and next as high levels of unemployment and debt hinder the region’s recovery, the European Commission said in February.

Foreign Reserves

Immelt will be able to tap GE’s foreign cash reserves to finance the deal, one of the people familiar with the discussions said. GE had about $89 billion in cash at the end of last year, including $57 billion held outside the U.S.

Some investors may be losing interest in GE as the conglomerate model, which groups several corporations in unrelated businesses under one parent, falls out of favor, Scott Davis, a Barclays Plc analyst in New York, wrote in a research note last month.

The company needs to “make bold decisions” and get out of non-industrial businesses such as banking and appliances, he said. Davis covers companies including GE and Honeywell International Inc. and rates both overweight.

“Investors are still looking for a GE that can be a pure play global infrastructure company: power-generation, aerospace, rail, even mining are all businesses that require capital, technology, global reach and exceptional project execution,” he said.

Immelt has been shrinking GE Capital, the finance arm, since the credit markets seized up during the 2008 global financial crisis, imperiling the parent company. GE plans to conduct an initial public offering later this year of its North American consumer-lending operations, now called Synchrony Financial.

Immelt Fan

Charles Smith, chief investment officer at GE investor Fort Pitt Capital Group Inc., said he’s a fan of the way Immelt has run the business, especially following the financial meltdown.

“He had sort of an awakening about GE’s balance sheet after 2008,” Smith, whose firm oversees about $1.7 billion, said in a phone interview. “He really buckled down. His willingness to really concentrate the investment in the energy segment has served the company well.”

GE, which has done more than 200 takeovers since Immelt took over, according to data compiled by Bloomberg, has struggled to make some large deals stick. In 2007, the company’s $8.1 billion purchase of Abbott Laboratories’ diagnostic unit was called off when the two sides were unable to agree on final terms. Under then-CEO Welch, GE’s $53 billion deal for Honeywell fizzled after it was blocked in 2001 by European regulators.

A deal with Alstom “is one where I think investors are probably going to like it on the surface but they’re going to withhold judgment until they see the execution,” said Peter Sorrentino, a Cincinnati-based money manager at Huntington Asset Advisors. The firm oversees about $14.7 billion.

“If it starts to deliver early on, within five quarters or so, I think everybody is going to be happy,” he said. “But if there’s some missteps early on, I think there’s definitely going to be a growing cry for new leadership.”

To contact the reporters on this story: Richard Clough in New York at rclough9@bloomberg.net; Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Beth Williams at bewilliams@bloomberg.net Molly Schuetz, John Lear


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Companies Mentioned

  • GE
    (General Electric Co)
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