Jeff's legacy

GE's Immelt sets powerful stage for his successor

Jeff Immelt says he's not leaving General Electric any time soon. That could be true. But his latest deal will, if successful, set a powerful stage for whoever eventually follows him as chief executive. The $13.5-billion bid for Alstom's power and grid assets would ensure the conglomerate derives around 75 per cent of its earnings from its industrial businesses by 2019, reducing the importance of its financial arm. And though it would take careful execution, the company may get there without compromising financial returns.

GE still needs to beat off global arch-rival Siemens. The German giant also covets Alstom's energy operations and has a trains business it hopes to trade with the maker of the pride of French industry, the TGV. French politicians, regulators and the public still have to be won over, too. GE, which has done business in France for half a century and completed 50 European deals in 10 years, is confident on both counts.

Assuming that confidence isn't misplaced, the company will still have its work cut out to make the transaction stack up. On paper, that looks more than plausible. GE is paying $13.5 billion net of cash on the books, plus about $1 billion of one-time integration costs. The assets are likely to generate operating income of about $1.4 billion on their own next year, according to Morgan Stanley.

Now fold in the $1.2 billion of cost savings that GE is heralding. That boosts operating income to $2.6 billion. Adjust for GE's global tax rate of around 25 per cent and the Connecticut-based company will be adding about $2 billion to its income statement. Divided by the all-in purchase price, that suggests a return on investment of nearly 14 per cent, above GE's weighted average cost of capital of around nine per cent. That's the case even with Alstom's $1.6 billion of pension liabilities thrown into the mix.

GE says it will take five years to realise the cost cuts. It definitely requires lots of careful execution, not least given Alstom's French base. But once integrated, industrial businesses will reign supreme at the company, assuming GE Capital will have hived off its credit cards business as promised. That's a reasonable legacy, after what would have been 18 years at the helm, for Immelt to pass on.