€1.5bn GE buyout to re-shape LM business


October 14, 2016

This content is from our archive. Some formatting or links may be broken.

General Electric was unsuccessful in its bid for Areva-Gamesa joint venture Adwen in August. But it turns out that the US giant had its sights on something bigger. This week, GE announced that it has agreed to acquire blade manufacturer LM Wind Power for €1.5bnfrom private equity firm Doughty Hanson in the first half of 2017.

It is an important deal as it shows how manufacturers including GE are looking to add more technical and engineering capabilities, so they can help to further reduce the levelized cost of wind energy.
And, ultimately, this is all about increasing market share.

Jérôme Pécresse, president and chief executive of GE Renewable Energy, said this transaction would enable GE to be “more local, have more flexibility and knowledge in turbine design and supply, and more ability to innovate and reduce product costs, while improving turbine performance”.

It should help GE to improve its ‘digital wind farm’ concept, and boost its services arm. The deal still needs regulatory approval.

Now, that is a relatively revealing quote, in the often-bland world
of corporate M&A press releases. It shows that GE’s wind arm is looking to further diversify from making turbines by growing its services operations and getting more involved throughout the supply chain. And there are some impressive numbers here.

Since 1978, LM Wind Power had produced more than 185,000 turbine blades, which corresponds to total installed wind capacity of around 77GW. It has a manufacturing footprint of 13 factories in eight countries on four continents: Brazil, Canada, China, Denmark, India, Poland, Spain and the US.

As well as GE Renewable Energy, LM also sells machines to the US giant’s major rivals including Gamesa and Goldwind.

It is that latter aspect where this deal gets really interesting. GE plans to keep LM as a standalone business run by its current management, led by chief executive Marc de Jong. This tells us that LM will be able to keep working with other turbine makers – but for how long? GE will be investing in LM to make blades more efficient, but we wonder whether it will be comfortable in making this technology available to others.

And there are other commercial sensitivities to consider too. Over time, GE and LM will become more closely intertwined and, as that happens, the risk of commercially sensitive GE information ending up in rival hands must grow. Accidents happen. GE has invested heavily in its ‘digital wind farm’ concept in recent years, and it will not want to give up information that gives it a commercial edge.

It may work for LM to continue its relationships with non-GE turbine manufacturers for the next couple of years but, in our view, that must change. This also gives GE a great chance to monopolise LM technology and cut out some of its rivals.

And it might even force GE to buy another manufacturer so these LM factories can maintain the scale of production they are used to. We see a good chance of more M&A activity by GE.

It concluded its €12.4bn acquisition of Alstom’s energy assets last November, and has now added LM for €1.5bn. Renewables is clearly an area that GE chief executive Jeff Immelt has earmarked for further investment. It would not surprise us if GE eventually came sniffing around the likes of Enercon and Senvion, as either of these could help give GE a stronger footprint in the European onshore wind market.

The other interesting aspect of this deal is Doughty Hanson, which has owned LM Wind Power since 2001.

Over that time, LM has grown from a business with annual sales of €260m employing 2,500 people to sales of almost €1bn with 9,000 staff. The takeover is valued at 8.3 times LM’s forecast Ebitda, which puts it in a fair range for an established firm. For example, it is very similar to the 8.4-times multiple that Centerbridge Partners paid Suzlon for Senvion in its €1bn takeover last year.

On that basis, it looks like a good deal for GE.

As for Doughty Hanson, we see a few good reasons to sell now: LM has been a great growth story but, with slower growth forecast for the wind industry in the next few years, it makes sense to sell out. It can then reinvest in a market offering faster growth.

In GE, it found a willing buyer. And we have a feeling that GE has one more big wind M&A deal in it before this decade is done.

Investment expertise. High-quality events. Exclusive content. Lead generation.

Talk to the Tamarindo team today to find out how membership would benefit your business.

Related content