Whisper it quietly but General Electric Company just found $1.8 billion for investors. Essentially, the company now expects cost synergies from the intended integration of Alstom to produce $3 billion in annual cost savings by the fifth year, up from a previous target of $1.2 billion. With CEO Jeff Immelt outlining the details at the Electrical Products Group conference at the end of May, I thought it would be a good time to look at what he said, and why the news is so important for GE investors.
General Electric Company sees a complementary deal. Source: General Electric Company
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Back to basicsAt the time that Immelt announced the offer for Alstom's energy assets, it was tempting to dismiss the deal as unimaginative. Buying a slowly growing rival and consolidating a core industry isn't the sexiest of corporate maneuvers. On the other hand it's, arguably, exactly what General Electric investors need to see right now. In a sense, the Alstom marks is the cornerstone of the plans to divest noncore assets and shift the company toward an industrial focus.
In order to demonstrate the positive trends in the deal, I've outlined the adjustments to company guidance in the following table. The deal was initially announced on April 30,2014, and is planned to close in 2015, which would make 2020 the fifth year of the deal. To put the EPS figures in context, analysts are currently forecasting around $1.29 in EPS for 2015 -- so the positive impact predicted for 2018 (where the cost savings will be close to the full run rate) is significant.
Source: General Electric Company Presentations
Considering that the deal value of around $13.5 billion, the additional $1.8 billion in cost savings would be significant. It's also an indication that there are clear benefits to focusing on its core businesses
Indeed, as outlined in a previous article, the stock is interesting precisely because a large part of its earnings are going to be driven by execution in the next few years. In my view, the kind of "blocking and tackling" execution implied in updated guidance on cost synergies is precisely what the company needs to be doing for investors.
Where the synergies are coming fromA detailed breakout of where the increase is likely to come from also reveals some positive news for investors.
Source: General Electric Company presentations; all figures in millions of U.S. dollars
Moreover, Immelt had some soothing words for those worried about the execution risk in the deal. It's part of the near-term risk that credit rating agency Moody's highlighted recently,but listening to Immelt would have assuaged some concerns.
According to him, the SG&A "stuff is straightforward," and with regard to the manufacturing improvements he plans to:
In summary, he described the execution risk as being "relatively small."
The takeawayAll told, the extra cost synergies found are further evidence that the company is right to focus on its core industrial activities. The Alstom energy deal now looks an even better value -- provided the deal gets regulatory approval.
Immelt's commentary on the execution risk is well received, because any dissipation of risk is likely to lead to rerating of the stock in future years. Now all the company has to do is execute. The good news is it appears to be on the right track with Alstom.
The article How General Electric Company Just Found $1.8 Billion originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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