ALSTOM SA ALSMY
November 06, 2017 - 1:10am EST by
elehunter
2017 2018
Price: 34.91 EPS 1.19 1.72
Shares Out. (in M): 222 P/E 29.34 20.30
Market Cap (in $M): 8,973 P/FCF 20.18 17.54
Net Debt (in $M): 501 EBIT 487 575
TEV ($): 9,482 TEV/EBIT 19.47 16.49

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  • Industrial Goods
  • Railroad
  • M&A (Mergers & Acquisitions)
 

Description

 
Siemens AG (SIE GR) and Alstom SA (ALO FP) announced on September 26, 2017 an agreement to combine their rail businesses in a merger of equals (newco to be named “Siemens Alstom”), a deal bringing together former arch-rivals from Germany and France to create the second largest global rail company behind Chinese state-owned CRRC (1766 HK), formed in the summer of 2015 through the merger of China’s two largest train or “rolling stock” manufacturers, CSR Corp and China CNR Corp. Siemens Alstom’s combined $18 billion in sales still lags far behind CRRC’s $35 billion, but this may be a bit of an unfair comparison as 92% the latter’s revenue comes from its protected access to the huge Chinese market. In terms of the international market ex China, Siemens Alstom will be the clear global leader.

 

We believe that the merger will make it through the lengthy antitrust review process with minor remedies, largely because of the small (< 20%) share of the combined entity in the global rail supply market, as well as the significant competitiveness of a number of well-capitalized competitors in areas where there is more market concentration (companies such as Bombardier, Hitachi and Stadler).  We also believe that this merger is truly transformative, giving Alstom a broader geographic footprint, a better business mix weighted more heavily towards the higher margin signaling and services businesses, and a diversified 4 year backlog that will provide very strong visibility.  Furthermore, post deal the company will be in a net cash position of over € 500 million, which will provide the company will significant balance sheet optionality.  For all these reasons, we believe Alstom should trade at least at a peer multiple EV/EBITA (PF FY18E) of 11.0X, which equates to a pre-dividend share price of € 45 per share for 29% upside.

 
 
Merger Terms:
 
Alstom shareholders will get two special dividends of €4.00 per share each (€900 million) – one serving as a control premium from Siemens, the other being the extraordinary dividend paid out of the proceeds of Alstom’s put option from the GE JV, worth about €2.5 billion (ie a partial payout). These will be paid on the day prior to closing, expected by the end of calendar 2018.
 
Siemens will contribute its Mobility business to the newco as well as the rail traction drives business (which generates about €600 million in revenue). In exchange, Siemens will gain control of 50.67% of the newco as of the combination date. The company has the right to acquire 2 percentage points of additional shares (via warrants) four years after closing.
 
If Alstom backs away from the transaction it will have to pay a break-up fee of €140 million.
 
The French government has committed to refrain from exercising an option to acquire the 20 percent stake in Alstom that it borrowed from French construction firm Bouygues SA. Bouygues in turn has pledged to hold on to its shares until the transaction is approved by shareholders, or until July 2018 at the latest.
 
Combined pro forma stats of Siemens Alstom: backlog of €61 billion, 62,300 employees in >60 countries, revenues of €15.3 billion and adjusted EBIT of €1.2 billion (8% margin). Net-cash at closing is estimated to be between €0.5 and €1.0 billion. This is after the cash-out of €1.8 billion to fund the two extraordinary dividends. Siemens will contribute zero net financial debt,pension liabilities of around €400 million and project finance liabilities of €300 million.
 
 
Regulatory Hurdles:
 
On a regional basis, a combination between Siemens and Alstom will create a very strong player in many markets, so the limiting factor in this deal is without a doubt going to be the anti-trustreview. The European Commission may impose conditions like re-selling significant assets such as UK signaling assets or rolling stock production sites in Germany. But in reality, both management teams have good reason to be optimistic that anti-trust clearance can be achieved. The two suppliers have less than 20% of the global market share of the rail supply market, and where there are concentrated sub-segments, there are strong, well-capitalized competitors that could buy divested assets in any remedy situation.
 
If we look at specific segments, we find varying degrees of concentration. In high-speed trains, Alstom has a market share of about 50% in Europe but less than 10% worldwide due to China’s domination by CRRC. While some countries like China, Germany and France typically award tenders to their national champions, outside of these home markets competition is fierce, and a merger between Siemens and Alstom will not change this.
 
The regional train sector shows similar patterns, but competition is opening up and there are some strong players. Despite high market concentration in countries like Germany, Belgium and France, because there are such formidable competitors including Bombardier, Stadler and Hitachi, EC remedies will likely be limited.
 
The market for railway signaling systems, which are designed to control the railway traffic and to guarantee the safe operation of trains on the railway network, is largely national, with high barriers to entry, although trends towards higher standardization may change this. The merger with Siemens and Alstom will create a formidable European player with at least a 40% market share in some countries, but with strong competitors like Thales, Bombardier and Hitachi, there are likely some logical remedies.
 
 
Synergies:
 
Management of both Siemens and Alstom have set a target for cost synergies of a pre-tax run rate of € 470 million (3% of combined revenues) to be achieved within 4 years post deal closing. The group is expected to have double digit EBIT margins by 2020 (vs 8.0% pro forma).
 
Potential sources of cost synergies, other than reduction of personnel include
 
- Procurement savings: raw materials (especially steel and aluminium), as well as various components, are likely to be a significant proportion of costs within the rolling stock business. The number of suppliers in a large number of areas can be pruned, which should result in supply chain savings.
 
- Scale benefits in SG&A costs: the combined organization can achieve economies of scale in functional and operational areas. In particular, pre bid processes for large contracts need not be duplicated.
 
- Product development costs: Future product development costs for the combined entity (for example for next generation high speed rail development) are likely to be significantly reduced as the two companies pool their R&D resources.
 
- Reduction in capex needs: One reason the capital intensity of the rail business is high is because customers (typically national rail operators) have local content
requirements for suppliers. Together, the two companies have complementary presence across markets. Alstom is strong in Africa, India, Middle East and South
America while Siemens is stronger in China, Europe and the United States.
 
 
Valuation:

Siemens Alstom pro forma for the merger trades at a FY18E EV/EBITA of 9.2X if you include just € 150 million of synergies (out of the € 470 million expected by year 4 post deal).  We think these synergies are quite attainable and the margin enhancement beyond FY18 is likely underestimated by the Street.  As such we think the stock should at a minimum trade at the MSCI Europe Capital Goods sector average of 11.0X.  With EBITA of € 1.52 billion, net cash offset by unfunded pension and other off balance sheet liabilities, and 452 million shares outstanding, this equates to a post-dividend fair value of € 37 per share and pre-dividend fair value of € 45 per share, for upside of about 29%.

 

Alstom (ALO FP) Valuation Pro Forma
Price per shareSi 34.91
Shares Outstanding, fully diluted (mm) 452
Equity market cap (€ mm) 15,779
Less special dividends (€ mm) -1,800
Less net cash after exercise of GE puts (€ mm) -700
Plus unfunded pension, other off B/S liabs 700
Enterprise Value (€ mm) 13,979
FY18E PF Revenue 16,700
FY18E PF EBITA pre-synergies 1,370
FY18E PF EBITA margin pre-synergies 8.2%
FY18E PF EBITA post-synergies (discounted) 1,520
FY18E PF EBITA margin pre-synergies 9.1%
EV/EBITA (FY18E pre-synergies) 10.2X
EV/EBITA (FY18E post-synergies) 9.2X
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Completion of EC antitrust review with minor remedies (late 2018)
  • Completion of merger in late 2018
  • Share buybacks with excess proceeds from exercise of GE put options in late 2018
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    Description

     
    Siemens AG (SIE GR) and Alstom SA (ALO FP) announced on September 26, 2017 an agreement to combine their rail businesses in a merger of equals (newco to be named “Siemens Alstom”), a deal bringing together former arch-rivals from Germany and France to create the second largest global rail company behind Chinese state-owned CRRC (1766 HK), formed in the summer of 2015 through the merger of China’s two largest train or “rolling stock” manufacturers, CSR Corp and China CNR Corp. Siemens Alstom’s combined $18 billion in sales still lags far behind CRRC’s $35 billion, but this may be a bit of an unfair comparison as 92% the latter’s revenue comes from its protected access to the huge Chinese market. In terms of the international market ex China, Siemens Alstom will be the clear global leader.

     

    We believe that the merger will make it through the lengthy antitrust review process with minor remedies, largely because of the small (< 20%) share of the combined entity in the global rail supply market, as well as the significant competitiveness of a number of well-capitalized competitors in areas where there is more market concentration (companies such as Bombardier, Hitachi and Stadler).  We also believe that this merger is truly transformative, giving Alstom a broader geographic footprint, a better business mix weighted more heavily towards the higher margin signaling and services businesses, and a diversified 4 year backlog that will provide very strong visibility.  Furthermore, post deal the company will be in a net cash position of over € 500 million, which will provide the company will significant balance sheet optionality.  For all these reasons, we believe Alstom should trade at least at a peer multiple EV/EBITA (PF FY18E) of 11.0X, which equates to a pre-dividend share price of € 45 per share for 29% upside.

     
     
    Merger Terms:
     
    Alstom shareholders will get two special dividends of €4.00 per share each (€900 million) – one serving as a control premium from Siemens, the other being the extraordinary dividend paid out of the proceeds of Alstom’s put option from the GE JV, worth about €2.5 billion (ie a partial payout). These will be paid on the day prior to closing, expected by the end of calendar 2018.
     
    Siemens will contribute its Mobility business to the newco as well as the rail traction drives business (which generates about €600 million in revenue). In exchange, Siemens will gain control of 50.67% of the newco as of the combination date. The company has the right to acquire 2 percentage points of additional shares (via warrants) four years after closing.
     
    If Alstom backs away from the transaction it will have to pay a break-up fee of €140 million.
     
    The French government has committed to refrain from exercising an option to acquire the 20 percent stake in Alstom that it borrowed from French construction firm Bouygues SA. Bouygues in turn has pledged to hold on to its shares until the transaction is approved by shareholders, or until July 2018 at the latest.
     
    Combined pro forma stats of Siemens Alstom: backlog of €61 billion, 62,300 employees in >60 countries, revenues of €15.3 billion and adjusted EBIT of €1.2 billion (8% margin). Net-cash at closing is estimated to be between €0.5 and €1.0 billion. This is after the cash-out of €1.8 billion to fund the two extraordinary dividends. Siemens will contribute zero net financial debt,pension liabilities of around €400 million and project finance liabilities of €300 million.
     
     
    Regulatory Hurdles:
     
    On a regional basis, a combination between Siemens and Alstom will create a very strong player in many markets, so the limiting factor in this deal is without a doubt going to be the anti-trustreview. The European Commission may impose conditions like re-selling significant assets such as UK signaling assets or rolling stock production sites in Germany. But in reality, both management teams have good reason to be optimistic that anti-trust clearance can be achieved. The two suppliers have less than 20% of the global market share of the rail supply market, and where there are concentrated sub-segments, there are strong, well-capitalized competitors that could buy divested assets in any remedy situation.
     
    If we look at specific segments, we find varying degrees of concentration. In high-speed trains, Alstom has a market share of about 50% in Europe but less than 10% worldwide due to China’s domination by CRRC. While some countries like China, Germany and France typically award tenders to their national champions, outside of these home markets competition is fierce, and a merger between Siemens and Alstom will not change this.
     
    The regional train sector shows similar patterns, but competition is opening up and there are some strong players. Despite high market concentration in countries like Germany, Belgium and France, because there are such formidable competitors including Bombardier, Stadler and Hitachi, EC remedies will likely be limited.
     
    The market for railway signaling systems, which are designed to control the railway traffic and to guarantee the safe operation of trains on the railway network, is largely national, with high barriers to entry, although trends towards higher standardization may change this. The merger with Siemens and Alstom will create a formidable European player with at least a 40% market share in some countries, but with strong competitors like Thales, Bombardier and Hitachi, there are likely some logical remedies.
     
     
    Synergies:
     
    Management of both Siemens and Alstom have set a target for cost synergies of a pre-tax run rate of € 470 million (3% of combined revenues) to be achieved within 4 years post deal closing. The group is expected to have double digit EBIT margins by 2020 (vs 8.0% pro forma).
     
    Potential sources of cost synergies, other than reduction of personnel include
     
    - Procurement savings: raw materials (especially steel and aluminium), as well as various components, are likely to be a significant proportion of costs within the rolling stock business. The number of suppliers in a large number of areas can be pruned, which should result in supply chain savings.
     
    - Scale benefits in SG&A costs: the combined organization can achieve economies of scale in functional and operational areas. In particular, pre bid processes for large contracts need not be duplicated.
     
    - Product development costs: Future product development costs for the combined entity (for example for next generation high speed rail development) are likely to be significantly reduced as the two companies pool their R&D resources.
     
    - Reduction in capex needs: One reason the capital intensity of the rail business is high is because customers (typically national rail operators) have local content
    requirements for suppliers. Together, the two companies have complementary presence across markets. Alstom is strong in Africa, India, Middle East and South
    America while Siemens is stronger in China, Europe and the United States.
     
     
    Valuation:

    Siemens Alstom pro forma for the merger trades at a FY18E EV/EBITA of 9.2X if you include just € 150 million of synergies (out of the € 470 million expected by year 4 post deal).  We think these synergies are quite attainable and the margin enhancement beyond FY18 is likely underestimated by the Street.  As such we think the stock should at a minimum trade at the MSCI Europe Capital Goods sector average of 11.0X.  With EBITA of € 1.52 billion, net cash offset by unfunded pension and other off balance sheet liabilities, and 452 million shares outstanding, this equates to a post-dividend fair value of € 37 per share and pre-dividend fair value of € 45 per share, for upside of about 29%.

     

    Alstom (ALO FP) Valuation Pro Forma
    Price per shareSi 34.91
    Shares Outstanding, fully diluted (mm) 452
    Equity market cap (€ mm) 15,779
    Less special dividends (€ mm) -1,800
    Less net cash after exercise of GE puts (€ mm) -700
    Plus unfunded pension, other off B/S liabs 700
    Enterprise Value (€ mm) 13,979
    FY18E PF Revenue 16,700
    FY18E PF EBITA pre-synergies 1,370
    FY18E PF EBITA margin pre-synergies 8.2%
    FY18E PF EBITA post-synergies (discounted) 1,520
    FY18E PF EBITA margin pre-synergies 9.1%
    EV/EBITA (FY18E pre-synergies) 10.2X
    EV/EBITA (FY18E post-synergies) 9.2X
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectThanks for the idea
    Entry11/06/2017 12:07 PM
    Memberbdad

    Elehunter,

    Thanks for the note. I was wondering if you could discuss the current operating environment. What are the top line levers? It this a business that primarily wins tenders through RFPs? Is there a maintenance/replacement part of the business? How big is the signalling business vs the rolling stock?


    SubjectRe: Thanks for the idea
    Entry11/07/2017 12:59 PM
    Memberelehunter

    Sorry for the delay.  So in terms of mix, based on 2017 annuals, Alstom had 43% rolling stock, 19% signaling, 20% service and 18% turnkey/systems exposure.  Siemens had 41% rolling stock, 38% signaling, 13% service and 9% turnkey/systems.  These were similar sized in total (Alstom has € 7.3B, Siemens has € 8.0B) and the pro forma combined mix becomes 42% rolling stock, 29% signaling, 16% service and 13% turnkey/systems.  Alstom's EBIT margins by division: 2.4% rolling stock, 8.5% signaling, 10.4% services, 5.7% systems, overall 5.8%.  This was expected by the Street on a standalone basis to improve to the following by FY20: 4.0% rolling stock, 9.6% signaling, 11.6% services, 6.6% systems, overall 7.0%.  While we don't know the EBIT margins by division at Siemens but anecdotally, I want to say they are about as follows: 6% rolling stock, 10% signaling, 11% service, 8% systems - if I plug those into their mix I get 8.3% which I think is roughly where they were in 2017 (there's a fudge factor given that we're pulling these divisions out of mother Siemens of course).  If I then combine both operations I get EBIT margins of 4.2% for rolling stock, 9.5% for signaling, 10.6% for service and 6.5% for turnkey/systems, 7.1% overall.  If I assume margin improvement for Alstom to that 7.0% level, and a slightly less ambitious trajectory for Siemens, I get the following EBIT margins for pro forma combined (2020 targets): 5.5% rolling stock, 10.6% signaling, 11.3% service, 6.9% systems, 8.1% overall.  If I then layer on on € 470 million in synergies across the board we then get margins of 11.1%.  Interestingly the Street almost universally tossed out Siemens' longer term (2022) target of at least 11% as too rosy.  In reality, if you believe synergies are attainable and you simply roll forward consensus margin expectations for both companies, this is not rosy at all.  

    In terms of top line levers, this is as you suspected, primarily there are RFPs - each country has a different process where some go automatically to national champions, others are more competitive bid processes.  Alstom has been on fire with orders - FY17 was the third year in a row with orders above € 10 billion (book/bill of 1.4X).  For example this year they won the large Amtrak high speed rail (€1.8 billion), the Dubai Metro (€ 1.3 billion) and several mid-sized orders in Europe.  FY18 probably will be a bit lighter on the order front because of the timing of large contracts and deferall of contract awards in the Middle East.  Demand in Asia, particularly India, is very strong.  Latin America is still plagued by weakness in Brazil, although Argentina appears to be picking up.  Urban rail projects are picking up in the US and Canada, though there are some questions around Federal funding in the US post elections (Trump...).  In France there should be a good pipeline with the next generation of very high speed trains coming.  Germany is also a bright spot,  and Siemens is well situated there.  

    As for the maintenance/replacement part, as you can imagine there is a significant component across a few divisions, but the companies are coy in giving a breakdown.  Alstom has said they are looking to get closer to non-rail service companies moving into rail operations, like Serco in the UK, with Alstom providing maintenance and technical support on network and traffic management.  Siemens is likely more advanced there given its position in road management solutions.  In rolling stock, one of the reasons why Alstom has so much lower margins than Siemens is that Alstom focuses on low volume, custom-made products that have a lower service component, while Siemens is more focused on modular, platform-based trains that have a higher service component. 

    One thing Alstom has talked about in conference calls and conferences is their effort in digital technologies.  They launched something called HealthHub which is a way to make a complete digital diagnosis of trains that attempts to implement predictive maintenance - they had been using this internally for their own maintenance contracts but are now starting to sell it to customers.  They also have launched something for passenger trains called the Optimet Orbanmap, which is an intelligent metro map that gives real-time information on traffic, wait times, showing which cars are empty, etc.  There's also a multimodal supervision solution which is a system that serves as an overlay for all single systems (all control centers for the metro, cars, bikes, buses) - it allows the public transportation authority to manage in real time the complete mobility of their cities.  Obviously all of these digital technologies could be very margin enhancing...

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