Thursday, 3 December 2015

GE - a quick Alstom deal sanity check

A quick update on General Electric after perusing their presentation on the Alstom power acquisition. I noted at the time of the former's Q3 numbers that:

'Net net I am still a believer in a US$30+ GE share price and will review my holding only at a share price above this level'

And guess where we are now?!

I wrote away from Financial Orbit that I was shifting to a more 'hold' centred position with the share above US$30 and I guess my observation with the Alstom deal metrics is just to make sure it materially does not impact the figures.  

First I note that the 'deal economics' have been impacted by the prolonged nature of the discussions although 'growth opportunities better than original outlook'.  From a surprise improvement the former observation sounds far more influential...

Meanwhile on the critical theoretical value add returns are greater than WACC by 2018 (my emphasis).  Hmm...that does not sound that exciting: 

Still got to see the final consideration worked out.  US$10bn odd is equivalent to c. 3% of GE's market cap.  And the initial boost to EPS?  5c odd a share (after some initial costs).  Well even ignoring the costs on a 'spend to save' medium-term basis, 5c is around 4% of the FY15e Industrial unit EPS.  In short that massively different from the proportional consideration.  

In short an ok acquisition but not mind-blowing.  All other matters being equal adopting a more 'hold' mindset to GE feels correct despite ongoing simplification and capital returns.  I just think the market is sort of there already and the story needs a new / not discounted leg.  

Been a great call however - and I do remain a 'holder' of a clear global leader. 

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