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From Antitrust Law Daily, September 8, 2015

GE gets go ahead from U.S., Europe to purchase Alstom's energy business

By Jeffrey May, J.D.

In order to resolve competition concerns over its proposed $13.8 billion acquisition of Alstom S.A., General Electric Company (GE) has agreed to give up portions of Alstom’s gas turbines business. A proposed final judgment, requiring the divestiture of Alstom's wholly-owned subsidiary Power Systems Mfg. LLC (PSM), would resolve U.S. Department of Justice concerns. In addition, European Commission (EC) clearance was conditioned on the divestiture of a package of Alstom assets relating to the development and manufacture of large gas turbines widely used in Europe (U.S. v. General Electric Co., Case No. 1:15-cv-01460-RMC).

Justice Department case. The Justice Department filed a complaint and proposed final judgment in the federal district court in Washington, D.C. today. Entry of the proposed final judgment by the court would resolve the Justice Department's antitrust concerns.

According to the Justice Department, PSM was GE's primary competitor in the aftermarket sale of parts and services for the installed base of GE gas turbines in the United States, and the proposed transaction would have reduced the number of competitors in the market from three to two. Thus, the loss of PSM as an independent competitor would have harmed owners of GE turbines. Gas turbines are a type of internal combustion engine widely used for power generation. A full set of replacement parts can cost several million dollars, according to the government.

The Justice Department's complaint alleged that, without the divestiture of PSM, the transaction would have reduced actual and potential competition for aftermarket parts and services for the most common gas turbine used for power generation—GE 7FA gas turbines. In defining the limited relevant market, the Justice Department explained that gas turbine aftermarket parts and services were distinct for each brand and model. Only a limited number of firms had the capability and experience to reverse engineer, manufacture, and improve the parts, it was noted. The geographic market was limited to the United States.

Within the defined market, GE and PSM had market shares of 83 and nine percent respectively, the government alleged. A third firm had a market share of only two percent and did not provide a complete line of 7FA aftermarket parts. The response of the third firm and any fringe participants in the market would not have constrained a unilateral exercise of market power by GE after the acquisition, according to the Justice Department.

Under the terms of the proposed final judgment, Florida-based PSM would be divested as an ongoing business within 90 days to a viable competitor. Ansaldo Energia S.P.A. has been identified as the expected purchaser of PSM; however, sale to Ansaldo is conditioned on U.S. approval.

European approval. European regulators focused on the deal’s impact on competition for the sale and servicing of heavy duty gas turbines operating in Europe. There, the market is concentrated with only four globally active full technology competitors: market leader GE, number two Siemens, Alstom of France, and Mitsubishi Hitachi Power Systems, according to today’s announcement.

EC clearance was conditioned on the divestiture of the main, technologically most advanced parts of Alstom's heavy duty gas turbine business and key personnel to Ansaldo:

  • Alstom's heavy duty gas turbine technology for GT 26 (large) and GT 36 (very large) turbines, existing upgrades and pipeline technology for future upgrades, excluding essentially only the technology for Alstom's older GT 13 model for which the Commission had no competition concerns;

  • a large number of Alstom R&D engineers who will continue to develop the Alstom heavy duty gas turbine technology;

  • the two test facilities for the GT 26 and GT 36 turbine models in Birr, Switzerland;

  • long term servicing agreements for 34 GT 26 turbines already sold in recent years by Alstom; and

  • Alstom's PSM servicing business.

The complex transaction is entering its final phase after receiving around 20 authorizations, according to the parties. No competition concerns were identified by U.S. or EC authorities with respect to other parts of the multi-stage transaction, such as GE’s purchase of Alstom’s thermal power generation business (other than gas) and grid business, Alstom’s acquisition of GE’s rail signaling business, and a series of joint ventures. The deal is expected to close in the fourth quarter of 2015.

International cooperation. Both the U.S. Justice Department and the EC noted their extensive cooperation in reviewing the transaction. The differing concerns and relief are based on market differences. Heavy duty gas turbines operate on either of two frequencies: 50 Hz and 60 Hz. Because all heavy duty gas turbines operate at the 50 Hz frequency in Europe, the EU’s focus was on those turbines. In the United States, heavy duty gas turbines operate at 60 Hz. The EC noted that it also cooperated with agencies in Brazil, Canada, China, Israel, and South Africa.

Attorneys: James K. Foster for U.S. Department of Justice. Jonathan Gleklen (Arnold & Porter LLP) for General Electric Co. Janet L. McDavid (Hogan Lovells US LLP) for Alstom S.A. and Power Systems Mfg. LLC.

Companies: General Electric Co.; Alstom S.A.; Power Systems Mfg. LLC; Ansaldo Energia S.P.A.

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