The "20% Catalyst" That Will Send These Shares into the Stratosphere

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We love the General Electric Co. (NYSE: GE) investment story.

In fact, we've been telling our readers of Private Briefing about it for months.

We're going to talk about it again today - with good reason.

The already strong investment case for GE just got even stronger.

On Friday, the French government finally backed General Electric's $17 billion offer for the power and electrical-grid businesses of Alstom SA (OTC ADR: ALSMY).

And that's not all...

In a surprise move, France also said it would take a 20% stake in the French engineering giant.

It's a complicated deal.

But it could serve as an additional "catalyst" for the GE share-price rally we've been predicting.

Here's why...

All the Hallmarks of a Lucrative Deal-Making Frenzy

We've been telling you about the industrial heavyweight since we first recommended it in the Jan. 21 Private Briefing report "The Secret Reason This Stock Could Zoom."

As we'll show you in a minute, this is a company that just has a lot going for it right now. GE is slimming down. And we've even seen some insider buying - a bullish sign with a stock that's down from its highs.

The Alstom deal is another reason to buy the stock.

GE has been pursuing Alstom's power businesses since making a bid in April. The move caught the French government badly off guard, kicking off a controversy and bidding war that eventually included Germany's Siemens AG (OTC ADR: SIEGY) and Japan's Mitsubishi Heavy Industries Ltd (TYO: 7011).

Last Friday morning, in fact - in a last-ditch bid to win Alstom - the Siemens/Mitsubishi partnership boosted their joint offer for the company.

But GE came away the winner.

French Economy Minister Arnaud Montebourg said General Electric and Alstom will create three joint ventures (JVs) in the areas of steam turbines, renewable energy, and electrical grid.

The deal also gives GE Alstom's gas-turbine business - a coup for the U.S. company because the unit's business and technology is held in high regard.

As part of the complicated deal, GE agreed to sell its rail-signaling business to Alstom. That unit was valued at $1.4 billion.

The French government is also buying in to Alstom - in fact, will become its single-largest shareholder - by acquiring a stake from the Bouygues family. With an ownership stake of 29%, the Bouygues group currently is Alstom's biggest stockholder.

The government's decision - which is drawing criticism - is designed to give France leverage over GE, which has promised to preserve Alstom's brand name, jobs, and status as an icon of French engineering and technology, The New York Times reported.

"We have reached agreements with Alstom's management that will create an alliance between our companies in both spirit and practice," said GE CEO Jeffrey Immelt. "The alliance will retain and strengthen France's presence in the energy business and reinforce Alstom Transport. It creates jobs, establishes headquarters decision-making in France, and ensures that the Alstom name will endure."

But Immelt didn't lose sight of why he pursued the deal in the first place. Experts are valuing the deal at only 7.9 times cash flow (as measured by so-called "EBITDA") for the 12 months ending in September. That's cheap - especially when you consider that GE is paying a bargain premium of only 25% for Alstom.

So Immelt is justified in claiming the deal is a good one for his company's shareholders.

"This proposed alliance also preserves the value of this deal for GE investors," Immelt said. "Our synergies remain intact. It is immediately accretive to our earnings, furthers the transition of our portfolio towards industrial businesses, and broadens our product and service offerings for customers."

And when you look at the details of the deal, it's pretty clear that GE is getting what it came for.

A (Very) Well-Crafted Plan

The GE/Alstom deal achieves three key goals. Let's take a look at them one at a time.

The deal will:

  1. Create an Alliance for the Energy Transition: GE and Alstom will establish two 50/50 joint ventures - one in the power-grid area and the second in renewables - to strengthen France's and Alstom's presence in energy and support its energy transition. In the power-grid area, GE and Alstom will combine their French power-grid properties to create an entirely new business. In the renewables area, the two firms will create a France-based business that includes Alstom's offshore-wind-power and hydroelectric-power businesses.
  2. Create a Global Nuclear and French Steam Alliance: This business will focus on the production and servicing of equipment for nuclear power plants, as well as the development and sales of new nuclear equipment around the world. There will also be a France-only initiative involving steam-turbine-equipment sales and services.
  3. Strengthen Alstom Transport: This agreement calls for GE to sell its top-ranked signaling business to Alstom. GE's signaling business is a leading provider of on-board and wayside signaling systems and communications solutions for the global rail industry. There will also be numerous "collaboration agreements" for the U.S. market involving services, technology, supply chains, and manufacturing and commercial support.

The Catalyst That Will Ignite the Shares

In reports we've given you in January, February, and earlier this month, we've detailed the reasons GE's shares are ready to rally.

The Alstom deal adds another bullish catalyst: The new assets will add immediately to earnings.

During its fiscal 2013 financial year, Alstom's power and grid businesses generated $20.2 billion in sales and $1.7 billion in operating income. In the near term, GE says the buyout will add as much as 10 cents a share in 2016. In the long run, GE says the new assets will create more than $1.2 billion in "cost synergies."

Over the last couple of years, GE has been streamlining its business - divesting poor performers and adding growth businesses. It's going to benefit from the looming spin-off of its consumer-finance unit.

And Immelt has his eye on long-term growth, too.

As Private Briefing readers saw in our April report "Guess Who's Going to Be the 'Google' of the 'Internet of Everything'," GE is actually transforming itself into an "applications-software" company that will benefit in a huge way from the IoE.

All in all, this is a major global industrial/technology company that's poised for a strong rebound - meaning you're getting a shot at the stock at just the right time. We think that makes it a great "safety play" if the current record run in U.S. stocks were to sputter - or even stall.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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