Alstom cuts a deal

    The approval of a comprehensive financing package will help Alstom’s recovery. The terms of the deal, however, require that Alstom enters into industrial partnerships, leaving the door open to possible mergers with rival groups. Siàƒ¢n Green reports.

    Alstom and the French government have reached a deal with the European Commission on a financing package that assures the immediate future of the troubled engineering group. The deal follows the announcement in September 2003 of a rescue plan for Alstom backed by the French state and a number of private banks.

    Under the g3.2bn ($3.9bn) rescue plan, the French state will become a shareholder in Alstom, while Alstom’s banks will provide a new bonding facility. In return for this, Alstom must sell certain assets and agree to enter into industrial partnerships. The package is in advanced negotiations and requires the full approval of the European Commission and Alstom’s shareholders. Alstom expects to receive the Commission’s approval by July 7.

    Alstom announced the deal alongside its full year results for the year ending March 2004. Patrick Kron, Alstom’s chairman and CEO described the results as “unsatisfactory”, showing a net loss of g1.8bn and a negative free cash flow of g1bn. However, he pointed to a number of positive elements, including a rebound in orders taken in the second half of the year, and the resolution of the GT24/26 issues. The company’s debt stands at around g3bn.

    The financing deal will help Alstom to reduce its heavy debt burden, as well as resolve other issues such as access to bonding facilities and a volatile share price.

    The package consists of three main elements: a g8bn bonding facility programme that will cover the company’s needs for the next 18-24 months; conversion into equity of g300m bonds held by the French state; and a capital increase of g1.5-2.2bn through a rights issue and a debt-to-equity swap. Through the conversion of bonds into equity, participation in the rights issue and conversion of existing loans, the French state will hold a 31.5 per cent stake in Alstom.

    While the package represents a strong boost to the ailing engineering firm, the European Commission has only agreed to the package with certain concessions: Alstom must dispose of businesses representing g1.5bn in sales; enter into a 50-50 joint venture in its hydropower business; and enter into industrial partnerships within the next four years. Alstom has already agreed on asset disposals worth g0.75bn, and says it will decide on disposing of a further g0.75bn within the next two years. According to an Alstom spokesperson, the company will retain its focus on power and transport, and further sell-offs will be from peripheral elements of its business.

    But although the company aims to retain its current business focus, the requirement to enter into industrial partnerships may see it lose control in certain key sectors. The European Commission has stipulated that these partnerships may not be formed with any company owned or controlled by the French government.

    The European Commission is reported to have insisted on the formation of partnerships in order to help guarantee the longer-term future of Alstom. The financing package will help Alstom in the short term, but the Commission does not wish to see the company seeking further aid again a few years down the line. Partnerships will help to put Alstom’s long-term future on more solid ground and secure the positions of its 75 000 employees.

    There have been no clues as to exactly what form these partnerships would take, but it is likely that any partner would exercise some level of control, and this presents Alstom’s competitors with an opportunity to get their hands on some of Alstom’s key operations. Prize assets might include its turbine business or its power service unit, for which the company has high hopes. Potential suitors include GE Energy, ABB and Siemens.

    Siemens will not comment on the potential for a tie-up between the two companies, and has been reported in the Financial Times to be opposed to such a move. While Alstom’s large market share and worldwide installed base of power equipment may provide Siemens with some opportunities, the two companies’ products are so closely aligned that it is hard to see what Siemens would gain through a partnership. In addition, such consolidation would likely be frowned upon by Brussels.

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    However, the deal that Alstom has agreed with the European Commission is set against the backdrop of attempts by the German and French governments to forge close links between national industrial companies and create ‘European champions’ of industry. German chancellor Gerhard Schràƒ¶der and French president Jacques Chirac have now agreed to hold regular talks to coordinate their industrial policy, a move that has been criticized by Brussels as being ‘protectionist’. However, now that Alstom is firmly in French hands, Paris may be open to discussing a tie-up between Alstom and Siemens if it feels that it would help to secure French jobs.

    Another alternative for Paris is to create a partnership between Alstom and Areva, the French group which last year took over Alstom’s transmission and distribution business. Areva’s state-owned status currently prevents this from happening, but the French government plans to privatize it. If it succeeds in doing this within the next four years, then Areva would in theory be allowed further links with Alstom.

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