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France gives green light to GE’s Alstom acquisition

Operations At Alstom SA's Tram PlantOperations At Alstom SA's Tram Plant
GE's acquisition of its power business means Alstom can focus on its trains and tram business, which it said is picking up.Photograph by Jason Alden — Bloomberg via Getty Images

The French government gave the green light on Wednesday for General Electric Co’s planned €12.4 billion ($15.6 billion) purchase of most of the power business of Alstom SA (AOMFF).

Economy Minister Emmanuel Macron said in a statement that the government would activate the process that would see it take a stake of up to 20% in from shareholder Bouygues SA once the GE-Alstom deal was fully completed.

It still isn’t clear how Paris, which is already in trouble with the European Union for running too high a budget deficit, will pay for the stake, or what price it will pay. Bouygues has the stake on its books at a value around €300 million above the current market value of €1.73 billion.

The announcement, though expected, is a big step towards completing one of the most politically sensitive mergers in recent years in France. It is due to be rubber-stamped by Alstom shareholders on Dec. 19.

Alstom was keen to get out of its loss-making power engineering business and focus on its transportation business. But when it agreed earlier this year to sell the cash-burning business to bigger U.S. rival GE, the news sparked a two-month tug-of-war with the government.

The government intervened in the deal to preserve jobs and ensure Alstom still had a future in the strategic power sector. After tough negotiations, GE agreed to set up three 50:50 joint ventures in electricity grids, renewable energy and nuclear power. Alstom in return bought GE’s rail signalling unit to beef up its rail arm.

Unveiling its first financial results since the merger Wednesday, Alstom said it expects the rail business to grow and generate cash this year, after registering record orders in the first half of its fiscal year ending March 2015.

Revenue rose 13% on the year and new orders more than doubled from a year earlier, thanks to a €4 billion order for 600 suburban trains from South Africa.

Over the medium term, the engineering group said it expects sales at the “new Alstom” to grow over 5% a year like-for-like and its operating margin to gradually improve within a range of 5%-7%. Alstom excluded activities being sold to GE in its orders, sales and operating income figures.

“The project with General Electric is progressing well,” said Chief Executive Officer Patrick Kron.

The level of cash to be returned to shareholders from the deal, as well as the group’s targeted balance sheet once it refocuses on its smaller transport arm, will be communicated ahead of the shareholder meeting in December, Kron added.

Some analysts expect Alstom to put aside around €2 billion euros for rail acquisitions and return €2 billion to shareholders via a special dividend or share buyback.