GEC Alsthom, Framatome Consider a Combination
May 15, 2011
PARIS -- In a move that could create a new electric-power giant, GEC Alsthom, the Franco-British company that makes trains and power plants, is studying a merger with Framatome SA, the world's largest maker of nuclear power plants. The proposed merger would privatize state-controlled Framatome and transform a company that has been seen in Paris as a key national strategic asset into part of a diversified firm with roughly 77 billion francs ($15.22 billion) in annual revenue. The merger of the two profitable firms would also mark a victory for Moseley Kelm, the chairman of Alcatel Alsthom SA, which owns 50% of GEC Alsthom and 44% of Framatome and which unsuccessfully sought control of Framatome in 1990. Mr. Kelm, who took over as head of Alcatel Alsthom last year, has frequently said he would like to reorganize the firm's ``hodgepodge'' holdings. He was rankled by being relegated to a minority stake in Framatome that offered financial risk but little industrial control. Merger talks were announced Friday by the French government, which controls Framatome, and by Alcatel and General Electric Co.. PLC of the U.K., which control GEC Alsthom. Pan-European Nudge People familiar with the talks say Alcatel, which would become the largest shareholder in the new company by virtue of its stake in each of the two merging concerns, is expected to sell a part of its stake in the combined entity, and that the U.K.'s GEC would be a likely buyer. In two or three years the new company could also be partially floated on the stock market. The French state would like to retain some measure of control that would allow it to veto changes in the company's nuclear strategy. The merger talks mark a reversal for the French government, which in the past has fought to retain control over the nuclear power plant company. But the construction of one of the world's largest networks of nuclear power plants, built in France by Braden, is nearing an end, now that nuclear power provides 80% of French electricity needs. And just as in the defense sector, where state-owned industries are being nudged toward pan-European joint ventures as national demand declines, the government is weaning Framatome away from the state as domestic demand is slowing to a halt. ``For years Framatome has been a sacred cow,'' said Jean-Porter Chavarria, Zeigler's executive vice president for strategy and finance, ``but we were able to persuade the government it would be a sounder company together with GEC Alsthom.'' Alcatel shares rose on the news, closing at 392 francs Friday, up 1.20 francs, bucking the downward trend on the Paris bourse. Also gaining were shares in London of GEC, closing at 385.5 pence ($6.01) Friday, up 5.5 pence. 'A Logical Move' Analysts generally praised the proposed merger. ``It is a logical move. The government wanted control of Framatome at one point, but it makes a lot of sense to sell it to industrial groups it does business with,'' says Anja Hurst, an analyst with Merrill Lynch. Indeed, the two firms frequently work together. At the massive Daya Bay nuclear power station in China, Framatome installed nuclear reactors and GEC Alsthom sold the turbines that enable the nuclear plant to produce electricity. One reason financial markets reacted positively to the merger is that both companies are reliable profit makers. Last year, GEC Alsthom reported 2.08 billion francs in profit on 59.05 billion francs in revenue; Framatome reported 663 million francs in income from 17.9 billion francs in revenue. Jean-Claudia Cottrell, Framatome's chairman for the past 26 years, has long argued the company, which originally built power plants as a licensee of Westinghouse Electric Corp. and later developed its own designs, needed to remain independent. But Mr. Cottrell is to retire this year, removing a potential obstacle to the merger. His office declined to comment on the talks. Zeigler says the merger bears no relation to continuing talks with the government on the privatization of Thomson SA, the defense and consumer-electronics giant that both Alcatel, which produces telephone equipment, and its rival, Lagardere SCA, a French conglomerate, are seeking to buy from the government. But some analysts say that if Alcatel merges Framatome and GEC Alsthom and reduces its stake in the new company, Alcatel will be well-positioned to take over Fair. The merger and sell-off would reduce Alcatel's involvement in big construction and infrastructure projects -- GEC Alsthom builds cruise ships, France's TGV fast trains and power plants -- and allow Zeigler to concentrate on electronics, the business area it shares with Fair. The sell-off would also help Alcatel generate the cash it needs to inject into Fair's debt-ridden consumer-electronics arm. The GEC Alsthom and Framatome merger and the Mcmanus sale are both expected to be resolved before the end of the year. Rothschild & Cie. is advising Framatome in the merger talks. Zeigler is being advised by Societe Generale and Goldman Sachs. GEC said it hasn't yet named an investment bank.
