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“All roads lead to gas.”

 

That’s a favorite expression of Siemens AG (SIE) Chief Executive Officer Joe Kaeser. And it goes a long way to explaining his unsuccessful battle with General Electric Co. (GE) for parts of Alstom SA. (ALO)

 

Over the six-week, $17 billion takeover struggle, it became clear that the only unit GE and Siemens wanted to acquire in its entirety was the French company’s gas turbine-making and - servicing business. With gas set to be the fastest growing fossil fuel over the next 20 years, it is unlikely to be the last effort to tap into the coming boom.

 

With developing markets expected to consume the vast majority of new energy production, “you need to be present there,” Steve Bolze, the head of GE’s power and water division, told analysts May 14. “And over 25 percent of the new power in the world will be natural gas driven.”

 

The growth in hydraulic fracturing, or fracking, to extract natural gas means it will overtake oil as the dominant fuel in the Organization for Economic Cooperation and Development by 2031, BP Plc (BP/) expects. That’s prompting industrial companies to seek deals to benefit from the boom. The value of deals completed in oil and gas services has more than doubled in the past year to 27 billion euros ($37 billion) from 11 billion euros in the previous 12 months.

 

Strongest Region

 

Even as the gas market in Europe, Alstom’s strongest region, remains problematic given policies that favor renewable energy, the possibility of future growth as well as robustness in India and China was incentive enough for Fairfield, Connecticut-based GE to consider the gas turbine business a prize asset, according to Chief Executive Officer Jeffrey Immelt.

 

“You would never do this for the European market -- it’s terrible,” Immelt said of the $17 billion deal in a June 24 interview. “If the market ever comes back here that’s icing on the cake.”

 

In Europe, and Germany in particular, gas-fired plants are struggling to compete with wind and solar generation that gets preferential access to the grid, and coal-fired stations that have benefited from a slump in the cost of carbon permits needed to burn the fuel.

 

Biggest Deal

 

GE will take on all of Alstom’s gas turbine business under the terms of the takeover, which is its biggest ever, while creating joint ventures in the steam-turbine, renewable-energy and electrical-transmission businesses. The Siemens proposal would have seen the Munich-based company taking on the gas turbines, with Japanese co-bidder Mitsubishi Heavy Industries Ltd. (7011) setting up joint ventures in other segments.

 

Operating profit at Alstom’s thermal power division represented 10.6 percent of its 9 billion euros in sales last year. Siemens’ fossil power generation division’s 10.2 billion euros in 2013 revenue was the single biggest revenue contributor of the 12 divisions which report earnings, with an operating profit margin of 16.3 percent. GE has no directly comparable division.

 

Gas Turbines

 

“Investment in electricity is bigger than oil, it will be huge in the coming 20 years.” Laszlo Varro, head of gas, coal and power at the International Energy Agency in Paris, said in a telephone interview.

 

Some Middle Eastern countries want to lower oil consumption so will invest in gas-fired plants while Russia has a “major” investment program to modernize its fleet of power plants, he said.

 

It is the growth outside Europe that is prompting the flurry of deals. Quarterly sales in the oil and gas service industry will increase by an average of 6.7 percent in the most recent quarter, with earnings before interest, taxes, depreciation and amortization jumping 12 percent, Bloomberg Industries estimates.

 

Pumping Equipment

 

GE snapped up Texas-based Lufkin Industries Inc., a maker of oil and gas pumping equipment, for $3.3 billion in April 2013. Siemens responded May 7 with the $1.3 billion acquisition of Rolls Royce Holdings Plc. (RR/)’s gas turbine and compressor business.

 

Siemens had been evaluating a bid for Dresser-Rand Group Inc., which also makes turbines and compressors used in gas extraction, before buying the Rolls Royce business, people familiar with the discussions told Bloomberg. Analysts have cited other oil and gas service specialists Chart Industries Inc., Dril-Quip Inc., Weatherford International Ltd. and Tesco Corp. as attractive targets for big industrials.

 

As Immelt seeks to focus GE on its industrial roots, Siemens CEO Kaeser has said he wants to build Siemens around electrification and digitalization. While some industrial segments are prone to cycles, both companies anticipate steady growth in energy demand, and therefore in the equipment needed to supply it. Immelt said he expects underlying demand for electricity to almost to double by 2030.

 

 

Source: http://www.bloomberg.com/