Bloomberg News

How GE’s Alstom Talks Almost Killed $17 Billion Deal

May 01, 2014

Turbine Diaphragm

An Alstom employee grinds a section of turbine diaphragm at Alstom SA's power plant turbine refurbishment facility in Rugby, U.K, on Tuesday, April 29, 2014. Photographer: Chris Ratcliffe/Bloomberg

Arnaud Montebourg, France’s industry minister, had a lot on his mind while he mingled at a state dinner at the White House.

It was the evening of Feb. 11, and a delegation of politicians and businesspeople was gathered to honor French President Francois Hollande -- an event reserved for the U.S.’s most important partners. Over caviar and quail eggs, conversation veered from building links between Silicon Valley and France’s tech industry to trade talks, and, more juicily, Hollande’s public split with Valerie Trierweiler, his longtime partner.

Just hours earlier, Clara Gaymard, the head of General Electric Co. (GE:US)’s operations in France and part of Hollande’s Washington entourage, had quietly pulled Montebourg aside at the U.S. Chamber of Commerce, telling him that GE, the 122-year-old U.S. industrial conglomerate, was interested in France’s Alstom SA, people familiar with the discussions said.

Gaymard, 54, assured the minister that GE would keep the government informed of any discussions, which were at a very early stage, and Montebourg didn’t tell his staff about the brief conversation.

Secret Negotiations

Just more than two months later, Fairfield, Connecticut-based GE formally announced a $17 billion bid for Alstom’s energy assets, accounting for almost three-quarters of its revenue. That transaction was the result of months of negotiations that were kept secret from the French government and many of Alstom’s own executives, followed by a frantic attempt to derail the deal by rival Siemens AG.

This story is the result of on- and off-record interviews with more than a dozen people with knowledge of events around the GE-Alstom deal. Officials at Siemens, Alstom and the French government declined to comment. GE Chief Executive Officer Jeffrey Immelt, 58, said that Alstom, based in the Paris suburb of Levallois-Perret, initiated the discussions and that talks progressed from a meeting in February.

Back in Paris from the Hollande visit, Montebourg, 51, quizzed Alstom CEO Patrick Kron about possible partnerships. The two men met routinely, and Kron, 60, liked to use his face time with the minister to lament his dealings with SNCF, the national railway, or seek help on exports. He was less forthcoming when the talk turned to possible strategic alliances, even inviting Montebourg to make his own suggestions.

Trouble Ahead

Kron’s nonchalance hid what was taking place. Unbeknownst to the French government, Alstom had advanced in its discussions with GE about a transaction that aimed to sell the bulk of the business to the U.S. competitor.

Alstom had approached GE about a possible deal before the White House event. Kron andImmelt met at a casual dinner that month to discuss the proposal. GE took a few weeks to study it, before engaging with more intensity in mid-March.

Immelt dispatched a team from his energy group to review Alstom and make sure any issues weren’t operational, and that it could be run GE’s way. Once he received positive feedback, Immelt began working on the finer points of a possible deal.

Bouygues SA, the construction and communications company that owns about 29 percent of Alstom, also played a key role in the overtures to GE, and was supportive from the early stages. CEO Martin Bouygues’s conglomerate had been struggling to finance expansion amid a price war in the French mobile-phone market, and was looking for new sources of cash. A representative for Bouygues declined to comment.

Secret Meeting

On April 23, Kron was in Chicago for a clandestine meeting at the Peninsula Hotel with Immelt, who was hosting GE’s annual shareholders’ meeting in the city. The aim was to hammer out final details for GE’s largest-ever acquisition, which would help the U.S. company build a major bridgehead in continental Europe, home to Munich-based Siemens, the undisputed engineering champion in the region.

The two men agreed on the broad outlines of a transaction, which they planned to announce as soon as Monday, April 28, after Alstom had a chance to brief government ministers and its own board. While working through last-minute issues at the offices of Sidley Austin LLP (1119L:US), a law firm in Chicago, Kron and his advisers learned that Bloomberg News was reporting that GE was in talks with Alstom on a deal.

The executive knew this revelation would mean a frosty reception back home. The report had derailed his plan for an orderly process: telling the government first and then the public.

Nasty Surprise

With jobless claims at an all-time high and his approval rating below 20 percent, Hollande’s government was hyper-sensitive to any suggestion of a deal that could cost French jobs, and Kron hadn’t yet had time to make his pitch to ministers.

Pulled by the government from near bankruptcy a decade ago, Alstom had fostered a close relationship with the state over the years. As a major provider of industrial infrastructure -- from trains to trams to nuclear gear and power transformers -- the government kept a close eye on Kron and his strategy.

Thousands of miles away the next morning in the French capital, Montebourg received a 7:15 a.m. text message from an aide. A phone call followed, both informing him of the Bloomberg report. Montebourg first dismissed the story, saying Alstom had been the subject of takeover rumors for years. What’s more: He had Kron’s assurance that there was no alliance. The aide told him that this time it was serious.

Feeling Tricked

Montebourg’s staff began a frantic search for Kron. Calls to his mobile phone went straight to voicemail. Only later were they able to reach his private secretary, who told them the executive was in the air. A sleepy Gaymard, Immelt’s representative in France, was awoken in the U.S. and promised to rush to Paris the next day.

When Kron finally touched down at Le Bourget, the private-jet airport outside Paris, he was ordered to make his way straight to Bercy, the hulking Modernist complex on the banks of the Seine where Montebourg has his offices. The two men met at the minister’s office on the third floor with views of the Notre Dame cathedral, where Kron endured a frank discussion with Montebourg about his business dealings with GE.

Montebourg, who had just been promoted in a cabinet shuffle, taking on responsibility for the broader portfolio of economics, felt he’d been misled. Kron had “solemnly assured” the government that he had no projects for transactions, and finding out via the press was unacceptable, Montebourg said.

Before markets opened on April 24, Alstom issued a short statement saying that while it constantly reviewed its strategic options, the company had not been informed of any bid. When the shares started trading, they jumped 16 percent.

Political Plan

Immelt wasn’t alone in his pursuit of French engineering assets. Back in February, Siemens CEO Joe Kaeser, 56, had also made his way to Paris to meet Kron for a conversation about possible deals. The meeting was frosty and led nowhere. Kron made no secret of his dislike for the larger German rival, which competes in fields from trains to energy to power transmission.

Kaeser’s plan, as he pitched it, had both political and economic appeal: build two European champions from Alstom and Siemens assets, one for energy and one for transportation. The idea had the backing of German Chancellor Angela Merkel, 59, who had mapped out the notion of European industrial champions with Hollande in February, with a focus on cooperating in energy policy and helping protect Europe’s industrial base.

Kaeser’s proposal would lead to a vastly bulked-up Siemens in the highly profitable energy sector, while the French government could be wooed with the prospect of creating a giant rail manufacturer rooted in France, making both the iconic TGV high-speed trains as well as Siemens’s ICE model.

Lion’s Den

Looking for alternatives to a GE deal, Montebourg warmed to Kaeser’s plan, laid out in a letter to the government and Alstom. While GE has an excellent reputation in France, nurtured thanks to a successful jet-engine venture with defense contractor Safran SA and sites employing more than 11,000 staff, Montebourg saw the sale as ceding a crown jewel to the U.S.

In Twitter posts and press releases, he likened the GE deal to selling France’s aerospace industry to Boeing Co., rather than building what became Airbus Group SA, and accused Alstom of negotiating behind the government’s back.

Over three days, from April 24 to April 26, Montebourg went to Siemens to solicit a counteroffer. He soon made it clear he didn’t approve of GE’s bid.

Regained Footing

On the morning of Sunday, April 27, he declared in a press release that Siemens had made an offer to create “two European and global champions,” noting that the government and Alstom staff had learned of the GE talks only the previous Thursday. France, he wrote, “does not accept” that Alstom could opt for the GE bid without looking at alternatives.

That same day Immelt landed in Paris to win over the French government amid the political furor. An initial meeting with Montebourg was postponed in light of the Siemens proposal, which seemed to be quickly gathering pace.

Montebourg kept up his criticism of GE. On the morning of Monday, April 28, Montebourg tweeted that the government would “defend the strategic interests of France.”

Immelt arrived in the morning at the Elysee Palace in central Paris for his delayed meeting -- this time with Hollande, 59, joining Montebourg. Talking in English, as Immelt doesn’t speak French, Hollande and aides asked about GE’s financial commitments and its planned headcount in France. Immelt offered reassuring details that would later be in the press release announcing the bid.

Tough Choices

While Immelt’s task was to salvage a deal that had appeared home and dry, the two French politicians had to strike a balance between protecting national interests and appearing open to foreign investors.

Notwithstanding its name, France’s Socialist Party has long included a business wing, counting figures including Lazard Ltd. banker Matthieu Pigasse and Xavier Niel, the billionaire founder of Iliad SA, among its supporters. Hollande’s deputy chief of staff and economic adviser is Emmanuel Macron, 36, a former Rothschild banker.

Striking a balance between that camp and the more left-wing rank-and-file has been a challenge for Socialist leaders since former president Francois Mitterrand gave up on a disastrous plan to disengage France from global financial markets in the early 1980s.

Almost immediately after Immelt left the Elysee, that spirit of compromise resurfaced. The government wasn’t opposed to the GE deal, press aides told journalists, and was primarily concerned with protecting jobs and the independence of France’s nuclear industry. It wouldn’t take an official position between GE and Siemens provided those conditions were met, they said.

Revolving Doors

GE was back on the offense. Alstom’s board was more amenable to its offer because it was further advanced than Siemens’s. GE had also made the case to the government that it would expand high-tech research and development and employment in France, arguing Siemens’s extensive overlaps with Alstom would mean layoffs in the event the French company chose that deal.

Around 6 p.m. on the same day, Kaeser and his entourage arrived at the Elysee for their own meeting. Accompanying the Bavarian CEO was Chairman Gerhard Cromme, 71, who had deep business and political ties in France, as well as the heads of the infrastructure and energy divisions. Kaeser’s pitch lasted about an hour, before the group took their jet back to Munich.

Siemens Footnote

In its letter to Alstom management on April 26, Siemens had laid out its proposal, sweetening the plan with job assurances. The response from Alstom: silence. Mildly irritated, Siemens executives followed up with a second letter three days later, saying the lack of feedback from Kron’s team was disappointing.

By then, GE’s approach had regained its footing. Early on April 30, Alstom announced it would begin negotiations with the American company, while leaving the door just slightly ajar for Siemens by saying it could still consider other proposals.

That GE had the inside track was made clear in an internal newsletter sent to Alstom staff the same day. It gave the Siemens possibility just a single paragraph, while spending almost two full pages extolling the virtues of Immelt’s deal.

Immelt’s subordinates were quick to lay out the natural fit between GE and Alstom. Alstom, they said, was after all the product of a 1920s merger between a French engineering company and the local subsidiary of Thomson-Houston Electric Co., itself a cousin of General Electric (GE:US). By going American, Alstom was ultimately coming home, they argued.

Whichever side of the Atlantic the Alstom assets land on, Kron’s legacy will be that of a CEO who both saved and sold most of his company. For Immelt, the implications will be similarly sweeping. The executive has spent much of his tenure reorienting GE toward its industrial roots, after a foray into high finance almost sank the company during the financial crisis. Alstom in many ways would complete his drive.

To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net; Matthew Campbell in London at mcampbell39@bloomberg.net; Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net; Simon Thiel at sthiel1@bloomberg.net; Aaron Kirchfeld at akirchfeld@bloomberg.net Benedikt Kammel, Larry Reibstein


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