PARIS (Reuters) - France chose General Electric to form an alliance with Alstom on Friday, rejecting an offer from Siemens and Mitsubishi Heavy Industries, but said the deal still needed some work and added the government would buy a 20 percent stake in the hotly-contested company.
Economy Minister Arnaud Montebourg said he had used a newly-created state decree to reject both of the existing offers as not being in France's strategic interest, and had formulated fresh demands for GE (GE.N) Chief Executive Jeff Immelt.
The decision ended weeks of suspense surrounding one of Europe's fiercest industrial battles in years, but left open major questions about the final shape of an alliance which GE hopes will give it access to new power markets.
"The points we have raised with General Electric are precise and technical but necessary," Montebourg told a news conference after two days of talks involving the bosses of the three suitors, President Francois Hollande and top ministers.
He said France had demanded strict conditions "guaranteeing energy independence, job creation on national territory, and maintenance of decision-making centres in France".
"The offers were of equal quality but the truth is, the negotiations were much more advanced between Alstom and GE," said an Hollande aide.
Siemens said it respected and understood France's efforts to preserve its national interests. MHI said it regretted the decision but looked forward to cooperating with other French companies as it has with nuclear group Areva (AREVA.PA).
GE and Alstom declined to comment.
Montebourg said he understood the Alstom board would meet later on Friday and give its view. Alstom's board is due to decide on the deal by Monday, when GE's binding offer expires.
Montebourg confirmed that Alstom's lucrative gas turbines arm would be purchased by GE and said there would be discussions on the shape of joint ventures in other energy areas ranging from renewables to nuclear.
He said that as a prerequisite to a deal and to ensure its demands are met, the French state would come in as the top shareholder in Alstom by purchasing a 20 percent stake in it from Bouygues (BOUY.PA), currently the holder of 29 percent.
However, the government and Bouygues have yet to agree on the price of the stake, sources with knowledge of the talks said. Based on Alstom's current market capitalization, a 20 percent stake would be worth 1.7 billion euros ($2.32 billion).
A Bouygues spokesman declined to comment.
Bouygues purchased its stake from the government in 2006, after Alstom was rescued from near-bankruptcy in 2004 through a state-backed bailout. Bouygues bought the stake for around 2 billion euros with the aim of creating a top player in nuclear power infrastructure.
Alstom's sensitive nuclear activities will be held in a 50:50 venture with GE in which the French state would have a "golden share" giving it a veto, said the economy minister, a self-styled "economic patriot" from the French left.
GE will also sell its rail signaling business to Alstom as part of plans to strengthen the transport activities of the French group, maker of the famed TGV high-speed trains.
Montebourg said the signaling business was valued at "one billion dollars or euros, I am not sure". He gave no other valuation details during the news conference.
The government's active intervention in the GE-Alstom deal is "indicative of the protectionist type of environment you have to deal with when doing business in France," said Russell Solomon, senior vice president and lead GE analyst at Moody's.
He noted however that GE, which employs some 10,000 people in France, is already very familiar with the business environment there and "they know what needs to be done to get the regulator comfortable."
Alstom suffered more than bigger rivals from the 2008 economic crisis, which depressed electricity demand and caused a slump in the market for new power plant equipment, hitting its cash flow and ability to service debt.
But its assets are valuable to rivals slugging it out in a tough market. Linking up with Alstom will allow GE to provide turbines for power stations and technology for electricity grids, something Siemens, eyeing Alstom's high-margin gas turbines for itself, and MHI wanted to prevent because it makes their U.S. rival even stronger.
However analysts said that GE and Siemens both stood to benefit, regardless which one of them won the bid, as any deal would remove a competitor from the market that had been pushing down prices in a bid to grow its business. Alstom is the No.3 player in gas turbines after GE and Siemens, with a global market share that is estimated to be below 10 percent.
"Siemens should not be at a major disadvantage if GE buys the gas business," DWS fund manager Marcus Poppe told Reuters.
GE (GE.N) had radically overhauled its bid on Thursday, hoping to appease unions and politicians by transforming what was originally a straight purchase of the power arm into an offer of joint ventures similar to that of the Siemens-MHI bid.
In response, Siemens and MHI added 1.2 billion euros ($1.64 billion) to their offer for Alstom's energy business on Friday, taking their cash component to 8.2 billion, and simplified the structure of the deal, hoping to see off GE.
Siemens had said its offer, which valued Alstom's power businesses at 14.6 billion euros, well above GE's 12.4 billion, was "superior industrially, financially and socially," and pledged to create new jobs in France, a commitment GE also made.
Hollande's government blocked GE's initial advances on Alstom two months ago and forced it to improve its offer by encouraging Siemens to enter the fray and giving itself the power to block industrial tie-ups in strategic areas.
Yet sources involved in the back-room discussions over the past seven weeks said it was not clear whether there was a single government line. Several union representatives of Alstom and political sources told Reuters the saga had drawn a divide between Montebourg, who they said lent towards the Siemens-MHI plan, and Hollande, in favor of GE.
While no one has publicly drawn a link between the two cases, Hollande is also lobbying U.S. authorities to reduce the penalties which France's biggest lender, BNP Paribas (BNPP.PA), faces for breaching U.S. sanctions in 2002-2009, notably its dollar-financing of oil trade out of Sudan.
Additional reporting by Elizabeth Pineau in Paris, Joern Poltz in Munich, Maria Sheahan in Frankfurt and Jeffrey Dastin in New York; Writing by Mark John; Editing by Sophie Walker