General Electric Drags on Dow as Alstom Deal Gains Approval

The Dow Jones Industrial Average has fallen 0.14% near the end of this week's first day of trading, a modest decline as investors weigh new economic data. Existing-home sales rose to an adjusted annual rate of 4.89 million in May, the highest level in seven months; however, that coincided with the existing-home inventory rising to 2.28 million, the most in nearly two years.

Housing has been held back recently by a weak economy and, until recently, rising interest rates. But rates have fallen and unemployment slowly creeps lower, so housing is picking up again. Just don't expect that to last for long, as interest rates are expected to rise over the next two years, which will hold back a prolonged recovery and lead to more choppy data from housing.  

On the company side, General Electric remained in the headlines over the weekend as it moved closer to acquiring the energy assets of French conglomerate Alstom.

GE moves closer to a major acquisition
GE over the weekend received approval for the deal from the Alstom board of directors and the French government. Under terms of the deal, GE will buy Alstom's coal and gas turbine business and form joint ventures for the renewable energy, steam turbine, and electrical transmission businesses. Alstom will also buy GE's rail-signaling business for $825 million.  

The complexity in recent weeks centered around the French government's insistence that it get a 20% stake in the remaining Alstom, which will be done through an option agreed to after GE's acquisition is complete. Considering these joint ventures and the cash acquired, GE's out-of-pocket cost will be about $10 billion in cash, not the total enterprise value of $16.9 billion.  

A visual showing GE's Alstom acquisition. Source: General Electric. 

This will bring GE to collecting 70% in earnings from industrial profits, as planned by CEO Jeff Immelt. That reduces its reliance on financial services for earnings, which caused a lot of problems during the financial crisis.

Alstom doesn't fundamentally change an entity of GE's size, but it should solidify the company's strategic position in wind turbines, grid services, and power plants. When combined with $1.2 billion in anticipated cost savings this should be a good deal for shareholders. GE's shares may be down 1% today to drag on the Dow, but the stock is a better buy today than it was a week ago now that the Alstom acquisition has been agreed upon.