Alstom makes case for GE deal as profit and orders drop

PARIS Wed May 7, 2014 8:41am EDT

View of a Haliade 150 offshore wind turbine at Alstom's offshore wind site in Le Carnet, on the Loire Estuary, near Saint Nazaire, western France, April 27, 2014. REUTERS/Stephane Mahe

View of a Haliade 150 offshore wind turbine at Alstom's offshore wind site in Le Carnet, on the Loire Estuary, near Saint Nazaire, western France, April 27, 2014.

Credit: Reuters/Stephane Mahe

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PARIS (Reuters) - French industrial engineer Alstom (ALSO.PA) posted a drop in orders and annual profit and scrapped its dividend on Wednesday, underscoring its case for a deal with U.S. conglomerate General Electric (GE.N) to secure its future.

Alstom, which makes power generation and transmission systems as well as trains and trams, said last week it was reviewing a binding $16.9 billion offer from General Electric (GE) for its energy arm.

It also left the door open to a potential deal with Germany's Siemens (SIEGn.DE), an alternative European option promoted by the French government.

The government has repeatedly tried to weigh into the talks with GE, in an effort to protect jobs and plants in what would be France's biggest ever takeover by a U.S. company.

Alstom chief executive Patrick Kron said it was legitimate for the government to comment on the talks, but stressed the need for a quick fix for the group's problems. He said if Siemens made a formal offer it would be examined, but that the uncertainty risked hurting Alstom's business and staff morale.

"My goal is to ensure the process is serene, rigorous and transparent, but also that it doesn't drag on for too long because in the end it would take a toll on the company and its employees," he told reporters.

Siemens, which unveiled a long-awaited restructuring on Wednesday, confirmed it was considering an offer for Alstom's energy arm, but added it would not be pressured into a deal.

Alstom was bailed out by the French state 10 years ago and now needs help again as it battles with big debts, tough competition and weak demand in the energy market.

It saw orders fall 10 percent, net profit drop 28 percent and it also burned cash in its financial year ended March 31.

The government, which has a stake of less than 1 percent in Alstom but whose opposition could be a deterrent to GE, has said its aim is to secure a better deal. After voicing its preference for a tie-up with Siemens, it suggested a deal combining GE and Alstom's rail businesses.

Kron said he was more interested in GE's rail signaling activities than its diesel-powered locomotives, which are mainly used for freight. He called these a "niche" activity, mainly U.S.-centered and unlikely to bring synergies with Alstom's business, which focuses on passenger transit.

If Alstom's board decided at the end of the month to accept GE's bid, Kron said the deal would be submitted to the vote of shareholders in September or October, after consultation with staff representatives and competition regulators.

Alstom shares were up 0.9 percent at 1205 GMT. Analysts said the positive news came from stronger-than-expected free cash flow in the second half of the year. They also welcomed a late pick up in sales of gas turbines to 11 units over the full year, when Alstom had sold just one over the first nine months.

SHELTERING FROM THE STORM

A deal to sell Alstom's power businesses, which account for about 70 percent of its total revenue, would break up the group and leave it as a pure transport player. That side of the business has in recent years held up better than the power side, hit hard by a slump in orders for power equipment from utilities since the 2008 economic downturn depressed electricity prices.

Kron hinted he would eventually step down from a refocused Alstom and a company spokesman confirmed it would be driven by current transport chief Henri Poupart-Lafarge.

Kron said he was for now focused on leading the group's strategic transition and wanted above all to avoid a repeat of the bruising restructuring he carried out when he took the helm in 2003, when Alstom was on the verge of bankruptcy and ultimately rescued by the French state.

"There is the option of waiting for the storm to come and see if we'll stay afloat," Kron said. "And there's the option I've tried to promote, which is finding ways to bring the boat to port, to protect it from sinking when the storm comes."

Alstom's transport business saw its operating margin improve to 5.6 percent from 5.4 percent the previous fiscal year, helped by rising volumes and cost cutting. Profitability at its thermal power business also edged up to 10.6 percent but fell in renewables to 4.5 percent and in its grid unit to 5.6 percent.

It posted a cash outflow of 171 million euros ($238 million)for the full year, pushing net debt up 28 percent to 3.02 billion euros.

Sales were stable at 20.3 billion euros, while income from operations fell 3 percent to 1.42 billion euros. Analysts polled by Reuters had on average expected sales of 20 billion euros and income from operations of 1.2 billion.

Net income fell 28 percent to 556 million euros, hit by higher restructuring costs, debt servicing costs and taxes.

(Editing by James Regan, Chris Gallagher and Mark Potter)

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