Asia crisis hits GEC sell-off

Investors seek reduction in share price as co-owned maker of trains begins life on the stock market

THE pounds 2.4bn sale tomorrow of shares in GEC's part-owned Alstom subsidiary could be hurt by fears that an economic slowdown in Asia will damage the prospects for the world's number two maker of trains and power- transmission equipment.

Shares in Alstom, the joint venture vehicle between GEC and France's Alcatel, start trading tomorrow in Paris, London and New York after a share price is set. This is the largest European flotation ever, outside of privatisations. The company's advisers have set a price range between Fr190 (pounds 19) and Fr220 a share.

Investors say they want the shares priced at the low end to account for the risk that Japan's first recession in six years will drag down other countries in Asia, where Alstom derives 21 per cent of its sales. They are sceptical of Alstom's arguments that just under 3 per cent of sales come from the countries most affected by the slump, such as Indonesia.

"The company's saying not to exaggerate the importance of Asia, but the problem is it might spread," said Christian Albuisson, at Edinburgh Fund Managers. "The sector's not looking terribly attractive because of that."

Mr Albuisson still had not decided whether to buy shares in Alstom last Thursday, even after meeting with company executives.

Investors had been widely positive on Alstom's share sale, which comes as equity markets are at record highs, until reports of recessions in Indonesia and Japan this month. Now it looks like problems in the region could hurt the order books of Alstom and its rivals, Siemens of Germany and the Swiss-Swedish Asea Brown Boveri, if governments start postponing or cancelling infrastructure projects.

"Now that Asia's come up again, I'm not so sure the reception [for the Alstom sale] will be that enthusiastic," said Eric Bleines, manager for Indocam Asset Management. "Even if most of its contracts are in China, and China is relatively safe, I'm worried about the sheep mentality of investors who won't touch anything that has a hint of Asia." For that reason, he said he had not ordered many shares.

Still, analysts are advising clients to buy. Even at the high end of the range, Alstom is cheap compared with its European competitors. A price of Fr220 a share values Alstom at about 18 times 1998 earnings per share and 15 times 1999 earnings. That compares with price/earnings ratios for ABB and Siemens of about 21 for 1998 and 18 for 1999. "That leaves a margin for an increase in value," said an analyst at Meeschaert-Rousselle.

The company, known for its TGV high-speed train, recently

won a string of high-profile contracts. They include turbines for the Three Gorges Dam in China and equipment for the New York and Chicago subways. And its stock is expected to join France's benchmark CAC Index, which will drive demand from investors who track the index.

Alstom was formed in 1989 from a merger of the energy and transport units of GEC and Alcatel. It has since grown into a company with 110,000 employees in over 60 countries.

The share sale will free Alstom to expand on its own without having to seek approval from its parents, which have differed about the company's future direction. As part of the sale, Alcatel and GEC are selling shares to cut their stake in Alstom to between 21 and 24 per cent from 50 per cent now.

Alcatel and GEC are selling up to 109.25 million shares, and Alstom itself will issue up to 11.707 million new shares. Goldman Sachs and Credit Suisse First Boston are managing the sale.

Alstom, which changed its name from GEC Alsthom for the flotation, will seek to become the world's biggest train maker ahead of Adtranz, a venture between ABB and Daimler-Benz AG, and usurp ABB's spot as number one in power distribution gear.

It also wants to reinforce its position as one of the world's five biggest makers of power-generation equipment, a market dominated by General Electric of the US.

It has already expanded through acquisitions. It bought the energy transport and distribution activities of the AEG Group in Germany in 1997 and completed the purchase of Alcatel's Cegelec engineering unit last month.

Alcatel's chief executive, Serge Tchuruk, is still campaigning for a link between Alstom and Framatome, a French state-controlled nuclear energy company in which Alcatel has a 44 per cent stake. A planned merger between the two companies fell through last year after GEC would not accede to the French government's demand that it own less than 50 per cent of the new company.

Alstom, based in Paris, earned Ecu302m (pounds 200m) in the year ended 31 March, up 24 per cent. Sales rose 18 per cent to Ecu 11.1bn, while the value of the company's orders jumped 41 per cent to a record Ecu11.6bn.

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