Alstom has announced drastic measures to shore up its financial position, including the disposal of its transmission and distribution and industrial gas turbine businesses. Siân Green reports.
European engineering group Alstom has announced that it is planning to sell its transmission and distribution group and its industrial gas turbine group as part of wider plans to restore the company’s financial position. The announcement, made in mid-March, signals a renewed round of consolidation in the power equipment market amid weakened end markets.
Alstom said that it expects net losses to be higher than expected for the 2002/2003 fiscal year, reaching g1.3-1.4bn. When the company presents end of year results in May, it expects sales to be down four per cent on the previous year, and debt to stand just below A5bn.
These results reflect a post-tax provision of A1.2bn to account for the technical difficulties associated with its advanced GT24/26 gas turbines as well as problems with its UK rail unit. In addition, demand for its power sector products has fallen, according to Patrick Kron, chairman and CEO of Alstom.
“Alstom’s core businesses in the global energy and transport markets offer solid long-term growth prospects and attractive opportunities,” said Kron. “With its strong market positions, technology leadership, broad commercial presence and large installed base, the company is strategically well-positioned.
“However, we must face today’s reality. We need to adapt to the power market, where demand has significantly weakened over the past year, to address the additional costs of past operational problems, and materially strengthen our financial structure.”
Alstom’s power sector segment, which accounts for approximately half of the company’s orders, has been hit particularly hard by the downturn in the US power market (see PEI January/February 2003, Analysis). The transmission and distribution markets have weakened, says Alstom.
In addition, the company is facing higher costs and increased exposure as a consequence of delays experienced in finalising the technical recovery package for the GT24/26 product line. Alstom says it has reached settlements on 61 of the 80 units sold, with the remainder either subject to litigation or under negotiation. The company has therefore made a provision of A1.2bn in its accounts to cover this liability.
Alstom has therefore launched an immediate plan of action to reduce debt, improve operational performance, and overcome the technical ‘operational issues’ associated with the GT24/26 product line. The plan is essentially an extension of its last rescue plan, called ‘Restore Value’, which was launched in early 2002. ‘Restore Value’ aimed to raise g1.6bn through a number of disposals and a rights issue.
Its new plan is ambitious, aiming to raise A300bn by March 2004 through the sale of its transmission and distribution segment and industrial gas turbines business, as well as making annual savings of A500m within two years through cost reductions. These measures will, says Alstom, halve its debt by March 2005. It will implement a management team reorganization, which will see the departure of Power Sector President Alexis Fries, and will also reorganise its power sector business into three new groups: Power Turbo-Systems; Power Service; and Power Environment.
The disposal of two major business groups will help to refocus the company’s activities on power generation and transport. Alstom says that the sale of its Industrial Gas Turbines business, which comprises small gas turbines (
The planned sale of Alstom’s Transmission and Distribution segment has come as a surprise to many analysts. The segment, which includes Alstom’s high and medium voltage products and power conversion systems, accounted for 14 per cent of orders in fiscal 2002 and employs some 30 000 people around the world.
Between them, Industrial Gas Turbines and Transmission and Distribution have combined sales of over A5bn and an operating margin of 5-6 per cent.
Alstom’s plan of action was not well-received by the market, however. The company’s shares fell by half after the announcement. Analysts seem sceptical as to whether the company can achieve the goals it has set itself, and have likened the sale of the Transmission and Distribution business to selling the family silver.
But Alstom remains convinced that the plan will help to turn the company’s fortunes around. It has emphasised that its liquidity position remains strong, and that it has the backing of its banks to complete the recovery.
By 2006, Alstom says it will have a balanced portfolio of well-positioned activities, focused on power generation and transport, with sales of over A15bn. By March 2005, its total debt will have fallen from A5.3bn (March 2002) to A2-2.5bn.
Its Power Turbo Systems division, which will comprise its current gas and steam segments, will be positioned as number one in steam turbines, generators and plant engineering and construction, and will be recovering its position in gas turbines. Its Power Service group, (comprising Alstom’s customer service segment) and Power Environment group (consisting of its boilers, environment and hydro divisions) will also be top in their sectors, says Alstom.