October 24, 2018 Read More →

GE bet big on fossil fuels with Alstom purchase, and lost

Bloomberg:

There are bad deals, and then there’s General Electric Co.’s purchase of Alstom SA’s energy assets.

The 2015 takeover of the French company’s gas-turbine operations in many ways encapsulates the mismanagement that led to GE’s current turmoil. GE vastly overpaid for Alstom, prioritizing scale over logic and ignoring signs of a peaking market. The result is the almost $23 billion writedown GE announced in October, the majority of which is tied to the Alstom deal.

Plenty of GE watchers found things to like about the purchase when it was announced. Profit margins at the Alstom assets GE was acquiring were well below that of its own power unit. In theory, that was an opportunity for improvement. GE touted the prospect of selling more services across Alstom’s large installed base.

As it turned out, demand for gas turbines collapsed not long after GE completed the takeover, as clean energy became more affordable. Orders for services later crumbled as well, in part because of upgrades that reduced outages and extended turbines’ life. The underlying cash-flow assumptions for the Alstom deal now appear to have been dead wrong, and GE’s lax pricing discipline on its own contracts is coming back to bite it. GE’s power unit had an operating margin of 5.6 percent last year, compared with 10.6 percent in the year ended March 2014 for the Alstom thermal-power business that constituted the bulk of the deal.

Taking a writedown on Alstom is one thing. Unraveling this bad bet is a much bigger task.

More: GE’s $23 billion writedown stems from a bad bet on fossil fuels

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