Alsthom flotation arms GEC with pounds 2.5bn war chest for acquisitions

GEC yesterday launched a long-awaited restructuring by announcing the flotation of the Anglo-French joint venture GEC- Alsthom, a pounds 300m share buy-back and further disposals of UK industrial businesses. Once completed, the managing director George Simpson will have a pounds 2.5bn cash pile at his disposal. Michael Harrison examines how he might spend it.

The flotation of GEC-Alsthom will take place in the first half of next year and is expected to value the power systems and transportation group at between pounds 4bn and pounds 5bn. GEC and Alcatel Alsthom are selling off 52 per cent of their combined holdings and have agreed not to dispose of the remaining 48 per cent for a year after the flotation.

On flotation, the company will be renamed Alsthom and will be listed in Paris, London and New York with headquarters in France. The sale will net GEC between pounds 1bn and pounds 1.3bn. Together with the pounds 300m GEC expects to raise from the disposals of other UK subsidiaries and the pounds 1.2bn already in the balance sheet, GEC will have a war chest of pounds 2.5bn.

The proceeds will be used to finance acquisitions to bolster GEC's defence electronics business Marconi but Mr Simpson did not rule out returning more capital to shareholders in if it could not find businesses that would produce a satisfactory return.

The City broadly welcomed yesterday's announcements, the first real fruits of the restructuring programme since Mr Simpson arrived from Lucas 15 months ago and set out his blueprint for the future of the business in July. Pre-tax profits for the first half were 5 per cent higher before exceptional items at pounds 442m, broadly in line with expectations. The shares rose 13.5p to 403.5p. Although GEC had been planning to sell all of its 50 per cent stake in GEC Alsthom, Mr Simpson described the partial flotation as "a perfectly satisfactory outcome". GEC and Alcatel will appoint an equal number of non-executive directors to the board and Mr Simpson said he did not expect the senior management of the company to alter.

The scale of the buy-back was limited by tax complications since share repurchases are classed as distributions for tax purposes and therefore liable to Advanced Corporation Tax (ACT). GEC has authority to repurchase up to pounds 1.6bn of its capital but had it gone for a bigger buy-back it would have been left with surplus ACT when the tax is abolished in April, 1999.

Mr Simpson would not be drawn on the likely targets for GEC's acquisition spree but analysts were sceptical of how easy it would be for the group to find suitable deals. Last month it lost out to British Aerospace in the bidding for Siemens Defence Electronics and for the time being the French have ruled out foreign participation in the privatisation of the defence electronics group Thomson CSF.

Despite this Mr Simpson was upbeat, predicting that the re-organisation of the French defence industry would prove the prelude to it joining in a wider European consolidation that would inevitably involve GEC.

The UK industrial businesses which GEC expects to sell include its semi- conductor subsidiary GPS, Marconi Instruments and its aircraft chartering business. A handful of international trading businesses are also being sold.

Mr Simpson said GEC was continuing to work with Siemens to "reposition" their joint telecoms venture GPT. Having at first seemed intent on selling its 60 per cent stake, GEC may now hold onto it and may even seek to buy out Siemens holding.

GEC will appoint a new chairman early in the new year to succeed Lord Prior who retires in March.

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