Ansaldo's position in the heavy duty gas turbine market will be greatly strengthened thanks to conditions being imposed by the European Commission on the proposed acquisition of Alstom's energy businesses by GE.
Ansaldo’s position in the heavy duty gas turbine market will be greatly strengthened thanks to conditions being imposed by the European Commission on the proposed acquisition of Alstom’s energy businesses by GE.
Following an in-depth review, the Commission on 8 September announced it had approved the acquisition subject to divestment of key parts of Alstom’s heavy duty gas turbines business to Ansaldo Energia of Italy, which currently principally offers machines derived from former Siemens models in this sector of the market (V64.3A, V94.2, V94.2K, V94.3A).
The Commission had worries that the GE/Alstom transaction as initially proposed would have eliminated one of the main global competitors of GE in the heavy duty gas turbines market, where GE is the world’s largest manufacturer and Alstom is the number three or four player globally. This would have led to less innovation and higher prices in a market for a technology vital to meeting climate change goals. The commitments offered by GE address these concerns, the Commission said.
Concerning the other businesses that are part of the transaction, namely the thermal power generation businesses (other than gas), grid and renewables, the Commission did not identify any competition concerns essentially because the activities of the two companies are complementary and do not overlap.
Commissioner Margrethe Vestager, in charge of competition policy, said: "I am glad that we can approve this transaction, which shows that Europe is open for business and that Europe-based technology can thrive and attract foreign investment. We have had a very close and successful co-operation with the Antitrust Division of the US Department of Justice both as regards the investigation and the analysis of suitable remedies.
Divestment of Alstom’s key technology to produce heavy duty gas turbines to Ansaldo will ensure that European business and consumers continue to benefit from this innovation and know how.
Furthermore, advanced heavy duty gas turbine technology is crucial to face the challenges of climate change and modernising our energy supply. It is the most efficient, cleanest and flexible fossil fuel power generation technology and an important complement to more unpredictable generation from renewables – when the wind stops blowing it is mostly flexible gas-fired plants that can step in."
The Commission’s concerns
The Commission’s in-depth investigation focused on the markets for the sale and servicing of heavy duty gas turbines operating at 50 Hz, where Alstom competes directly with GE in Europe.
The market for heavy duty gas turbines is concentrated, observes the Commission, with only four globally active full technology competitors: market leader GE, number two Siemens, Alstom and Mitsubishi Hitachi Power Systems (MHPS). This is due to the large upfront investments in R&D, testing and manufacturing required, setting very high technological and financial barriers to enter the market. The fifth player, Ansaldo, has more limited R&D capabilities, a narrower product range and a more limited geographic reach, the Commission noted.
The GE/Alstom merged entity, as originally notified to the Commission, would have accounted for more than 50% of the European market for heavy duty gas turbines and also very high market shares in the worldwide market for 50 Hz heavy duty gas turbines. In fact, in Europe, the transaction as initially notified would have brought together two of the three main competitors, the Commission observed.
Alstom, with its GT26 and new GT36 turbine under development, which could be described as H class, is active in both large and very large heavy duty gas turbines segments, which are the technologically most advanced, said the Commission.
This makes it a significant and close competitor of GE and Siemens both from a technological and commercial point of view, especially in Europe, where operational flexibility provided by such turbines is very important to customers. MHPS on the other hand is a more distant competitor because of its different technological focus and because it is less active in Europe.
An economic analysis of bids for heavy duty gas turbine tenders over the last five years confirmed significant competitive interaction between the bids by GE and Alstom and indicated a risk of price rises, the Commission said.
The deal as originally proposed would also have risked eliminating an important innovator, the Commission concluded. Alstom’s heavy duty gas turbine technology is one of the most advanced, flexible and cleanest available, particularly well-suited to meet European customers’ requirements for operational flexibility, the Commission said. The transaction as notified would have reduced customer choice, R&D and innovation, with serious risks that certain Alstom heavy duty gas turbine models would be discontinued and that the newly developed and most advanced model (the GT36) would not be commercialised. This was of concern for many market participants, including major European power utilities.
Another issue was that the transaction as originally proposed would have eliminated competition from Alstom’s servicing subsidiary Power Systems Manufacturing (PSM) – purchased by Alstom from Calpine in 2012 – in the service market for GE’s mature technology heavy duty gas turbines (in particular the 9FA model). As GE is the dominant player in this market and PSM its most significant potential competitor, said the Commission, this would have created a risk of higher prices and less innovation.
In order to address the Commission’s concerns, the parties to the GE/Alstom transaction offered to divest the main, technologically most advanced, parts of Alstom’s heavy duty gas turbine business and the key personnel that would be involved with its future development. In particular:
¥ Alstom’s heavy duty gas turbine technology for the GT26 and GT36 turbines, existing upgrades and pipeline technology for future upgrades, excluding essentially only the technology for Alstom’s older GT13 model for which the Commission had no competition concerns. The GT36 is currently a technology development programme, which "upon completion would result in an H-class gas turbine product", says GE.
¥ A large number of Alstom R&D engineers involved with developing Alstom heavy duty gas turbine technology.
¥ Two test facilities, for the GT26 and GT36 turbine models, in Birr, Switzerland.
¥ Long term service agreements for 34 GT26 turbines sold in recent years by Alstom (with the service business for the remainder of Alstom’s gas turbine installed base (approximately 720 units) transferring to GE, as envisaged in the original acquisition proposal). And
¥ Alstom’s Florida-based PSM service business (although GE will receive a licence to the PSM intellectual property used to offer after-market services for non-GE gas turbines).
GE proposed Ansaldo of Italy as a potential purchaser for these assets. Ansaldo is an existing competitor in the heavy duty gas turbine market. It already has know-how, experience and an efficient factory for gas turbines and other power plant components (such as steam turbines and generators) that are often sold together with heavy duty gas turbines, the Commission noted.
The commitments offered by GE will allow the purchaser (ie, Ansaldo) to replicate Alstom’s previous role in the market thereby maintaining effective competition. Moreover, the divestment guarantees the continuation of Alstom’s distinctive sequential (two stage) combustion heavy duty gas turbine technology, which is particularly well suited to the flexibility needs of European customers, while at the same time offering the purchaser advanced R&D capabilities and incentives to continue pushing innovation in this important market for Europe.
Subject to these conditions, the Commission was able to approve the transaction under the EU Merger Regulation.
By way of background information on the heavy duty gas turbine market, the Commission cites International Energy Agency (IEA) forecasts that gas is expected to continue to be a significant source of electricity generation in Europe in the medium term and to grow further in the long term. The Commission also notes that modern heavy duty gas turbine technology is very research and capital intensive, while flexible and efficient heavy duty gas turbine technology will continue to be essential for creating a more climate friendly electricity generation system in Europe because it is complementary to renewables and also the most environmentally-friendly form of fossil fuel generation, which is "why EU funds under the Research and Technological Development Framework Programme are dedicated to heavy duty gas turbine research."
Given the complexity of the case and the global reach of the parties’ activities, the Commission says it co-operated with the competition authorities of a significant number of countries. This involved in particular close and successful co-operation with the Antitrust Division of the Department of Justice (DoJ) in the US. While the scope of the DoJ’s concerns was different due to different conditions in the US markets for heavy duty gas turbines (operating at 60 Hz), the co-operation involved regular exchanges of views and evidence and a joint approach to remedy discussions leading to satisfactory and mutually aligned remedy solutions for both EU and US concerns.
The Commission has co-operated throughout the procedure also with agencies in Brazil, Canada, China, Israel and South Africa.
GE says the European Commission and DoJ clearances pave the way for it to complete the transaction as early as possible in the fourth quarter of 2015.
GE also says it is close to finalising a deal to divest the above assets to Ansaldo and that this transaction would be expected to close after the closing of the GE/Alstom transaction, subject to required regulatory approvals.
Reduced purchase price
GE reached an agreement with Alstom in April of 2014 to purchase its power and grid businesses for €12.35 billion. Adjusting for the joint ventures announced in June 2014 (renewables, grid, and nuclear), changes in the deal structure, price adjustments for remedies listed above, and net cash at close, the purchase price is now expected to drop to approximately €8.5 billion.