GE’s $23 Billion Writedown Stems From a Bad Bet on Fossil Fuels

(Bloomberg Businessweek) -- 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.

As chief executive officer, Jeff Immelt personally negotiated the purchase, which cost about $10 billion after adjusting for joint ventures and other changes to which GE agreed to win the French government’s blessing and fend off a competing bid from Siemens AG. John Flannery, whom former Danaher Corp. CEO Larry Culp replaced as CEO in October, was one of the deal’s architects as GE’s then-head of M&A.

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.

The concessions Immelt made to close the Alstom deal may now hamstring GE’s effort to resuscitate its power unit. GE was required to pay $3.1 billion this year to buy Alstom’s stakes in three joint ventures, a cash drain it could ill afford. And France has threatened to fine GE if it falls short of Immelt’s pledge to create 1,000 net new jobs; it’s unclear how that will affect the company’s push for cost cuts.

Taking a writedown on Alstom is one thing. Unraveling this bad bet is a much bigger task.
 
• Over and Out
Most of GE’s writedown stems from the goodwill associated with the Alstom deal, aka the amount GE paid above book value.
 
• When Lower Is Better
Wind turbines’ cost per watt decreased about 35 percent from 2007 to 2018, according to Bloomberg NEF.
 
Sutherland is a deals columnist for Bloomberg Opinion.

©2018 Bloomberg L.P.