|Shares Out. (in M):||224||P/E||0||0|
|Market Cap (in $M):||10,222||P/FCF||0||0|
|Net Debt (in $M):||139||EBIT||0||0|
Alstom is a global industrial company based in France that offers a full range of products and services for the rail industry, specifically the transit (i.e., passenger) segment. On September 26, 2017, Alstom and Siemens agreed to combine their rail businesses in a merger of equals, uniting the two dominant European players into the second largest global rail company behind Chinese powerhouse CRRC. Combined Alstom entity will be 2x, 4x, and 8x as large as the #3, #4, and #5 players, respectively (Bombardier, Hitachi, and Stadler).
Alstom’s transformational merger with Siemens creates an opportunity to buy an above average quality business with significant cost synergy opportunities at a very attractive valuation. We’d direct readers to an earlier VIC pitch from November 2017 for additional detail about the transaction. Despite the transformational aspect of the deal and its many financial attractions, Alstom has been missing from most investors’ radar screens.
Areas of Inefficiency
Alstom/Siemens Merger Overview
Transaction Structure and Indicative Timetable
The ~$170bn global rail market is split 50/50 between OEM equipment and after-sales activities and is relatively fragmented with the three legacy global players (Siemens, Bombardier, and Alstom) together claiming ~13% market share, roughly equal to that of CRRC, the dominant Chinese competitor. Excluding China, however, where the Western players are effectively closed out of the market, Siemens and Alstom together have 21% OE market share compared to CRRC at ~4%. The market is probably more concentrated than these figures would suggest. Excluding China and maintenance / aftermarket work done by governments / customers themselves that is hard to isolate and is rarely in play, pro forma Siemens-Alstom has much more significant market share. Importantly, it has even more dominant market share in the higher margin signaling and services businesses (vs. rolling stock, which is more commoditized and lower margin).
The global rail transit market is characterized by modest through-the-cycle growth driven by a few macro trends: urbanization, congestion, environmental concerns, and infrastructure expansion / maintenance. Government spending on public transportation, which is based on passenger activity and the level of public funding, is the primary driver of industry demand. According to industry body UNIFE, the global transit rail market is expected to grow at a 3.2% CAGR until 2021, while Europe, Alstom’s largest market, is expected to grow at 3.0% over the same time period. Growth by segment should be relatively balanced across rolling stock, signaling, services, and infrastructure.
The primary investment controversy is the risk that CRRC poses to Siemens-Alstom outside of China. CRRC was formed via the merger of two Chinese state-owned companies, CSR and CNR, in 2015 and has a virtual monopoly in China. The large wave of spending on Chinese rail infrastructure has peaked and CRRC is looking to expand its presence in other emerging markets as well as developed markets like the US and Europe. Simply put, the fear is that the Chinese are cost advantaged relative to the European incumbents, can finance projects on terms that the incumbents are unwilling to match, and / or are willing to run their non-China business at relatively low margins for some period of time in order to establish a foothold.
We believe a few factors mitigate the CRRC risk: (1) CRRC has a more limited product offering, particularly in signaling, (2) high regulatory barriers to entry, especially in Western Europe, and (3) overstated cost structure / aggressive contract bidding fears. Alstom benefits from years of advanced R&D and technology investments, which provide competitive insulation for more complicated projects. In addition, local, national, and multi-national governmental organizations are often reluctant to grant contract wins to Chinese companies for passenger infrastructure-related contracts. While CRRC has won some pieces of business in the U.S., our research suggests that pricing was not anomalous relative to other similar contracts. Finally, many countries impose localization rules, e.g., the U.S. Buy America Act, which requires manufacturers to build a high proportion of total costs in the local area, which reduces CRRC’s advantage from manufacturing in China and shipping abroad. A pickup in domestic Chinese demand, which has been weak over the past few years, could also curb CRRC’s ability to utilize its manufacturing capacity for overseas expansion. Overall, we view the CRRC risk as exaggerated, especially on Alstom’s medium-term profitability, which is largely based on a very strong backlog. It’s worth noting that both Alstom and Siemens have record backlogs at the moment, despite a purportedly more competitive environment brought on by CRRC in recent years.
We believe there’s limited regulatory risk for the deal closing. The deal appears to have the support of both the French and Germany governments. The French government owns ~20% of Alstom and Emmanuel Macron has voiced his support for the transaction already. Alstom and Siemens are also likely using the CRRC threat as a means of pushing through what might otherwise have been a challenging deal to get done (both with regulatory bodies but also labor unions).
We and our affiliates are long ALO FP. We may buy or sell shares without notification. This is not a recommendation to buy or sell shares.
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.
|Subject||Siemens Mobility FQ2 Results|
|Entry||05/09/2018 12:33 PM|
Siemens Mobility reported strong FQ2 results today with comparable orders and revenue up 17% y/y and 9% y/y, respectively. In addition, segment adj. profit margin increased 200bps y/y to 11.1%. Siemens Mobility continues to deliver strong operating results and grow its backlog, which should bode well for pro forma Alstom.