Thursday, July 23, 2009

Alstom - Areva Acquisition a Value Destroyer ?

Today's press release announcing that Alstom's managers will be making a bid for Areva should concern any Owner.  Here is the key language from the press release:

Schneider Electric and Alstom are considering making a joint offer to acquire Areva Transmission and Distribution (T&D), recently put up for sale by its parent company.

In order to achieve this, Alstom and Schneider Electric would create a common structure which would bid for Areva T&D and, if this offer is accepted, would ultimately transfer the transmission activities to Alstom and the distribution activities to Schneider Electric. Such a transfer of activities would have no social consequences

The high voltage Transmission (T) part of Areva T&D is very close to Alstom’s own activities in power generation. Alstom will bring to Areva T&D its expertise and knowledge in power networks and automated systems, its know-how in the management of large projects and the full benefit of Alstom’s worldwide commercial network which is particularly focused on power generation utilities, the primary market for high voltage activities.

The medium voltage Distribution (D) part of Areva T&D is a business in which Schneider Electric is very active and that it would like to reinforce. Schneider Electric would bring to Areva T&D its considerable technical and operational strengths in automation and medium voltage, its worldwide sales network, as well as a complementary access to Industry, Building and Infrastructures , major markets for medium voltage activities.

This consolidation around two major worldwide industrial groups, specialised in their own fields, would represent a considerable development opportunity for Areva T&D’s employees.

Gudovac presented his views on the subject on 8.July   when he suggested that ALS at 30 Euros was a good buy. Here were Gudovac's thoughts:

Alstom's managers could always do something truely destructive such as trying to make a big acquisition. Owners should apply a massive negative discount to Alstom if a big acquisition is even rumoured. 

Gudovac will be following these developments closely. 

Don't Get Massacred !


  1. From a reader:


    What is your impressions of Areva as a renewables investment bet? I'm somewhat reluctant to bet on nukes, but it would be an interesting diversification for my investment emphasis on wind and geothermal.

    I really find your blog useful, in particular the posts on ABB and AMSC.........."

    Gudovac responds -

    I am always hesitant to make investments solely based on narrowly defined 'strategic themes'. These strategic themes tend to over price Enterprises because a theme is something Mr. Market relishes.

    Owners can be reasonably certain that Global Power demand will grow at GDP growth plus 10-25% - over the long term. Moving towards the question of what methods will generate that power is a more risky proposition. Mr. Market tends to ignore the risks and price all the growth.

    Gudovac is a huge fan of renewables (and not only because of his tidy return on the wind turbine company he owned for a bit). Renewables are mainstream and will continue to be installed at double digit growth rates as-far-as-the-eye-can-see.

    However, trying to determine which renewables will win out (wind, various permutations of solar, hydro, or all the rest) big for owners has far too many unknowns to interest Gudovac.

    Of greater interest to Gudovac is Management. Highly skilled management can generate sensible returns even in stable industries. Highly skilled managers can be pro-active about a changes in their industry.

    Never Forget - Unskilled Management can lose money even in a booming growth industry.

    Nukes ? I haven't looked deeply at Areva, so can not speak to Areva's management - but in general, Nukes are a perfectly sensible method of generating baseload power.

    Nukes are highly sensitive to 'first costs' - ie interest rates and debt-equity ratios. (as well as the obvious issue of regulatory environment - See Germany) .

    In order to determine what would be a likely growth rate for Areva's Nuke business. I'd understand deeply the long term prospects of the capital markets for funding this type of Project Finance.

    Gudovac discovered in one of his Enterprises which supplyed equipment to the Hydro industry (similar to Nukes in that costs are all up front - operating costs are nil) that interest rate changes was the best single predictor of demand (ie Hydo projects getting ordered).

    We developed a nuanced Algorithm for Hydro orders based on changes in interest rate environment. We used it to adjust prices on tenders. When demand was predicted to be high, we raised our prices significantly. It proved a highly sensitive predictor of demand.

    When rates went down, hundreds upon hundreds of shelved Hydro projects were dusted off and green lighted.

    Gudovac suspects that Areva's business is also driven by changes in interest rates. Before buying Areva, I'd want to have a deep understanding of the key driver of its business.

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