• Reuters


France chose General Electric to form an alliance with the power and rail company Alstom on Friday, rejecting an offer from Siemens and Mitsubishi Heavy Industries (MHI), but said the deal still needs some work and the government will buy a 20 percent stake in the hotly contested company.

Economy Minister Arnaud Montebourg said he had used a newly created state decree to reject both of the existing offers as not being in France’s strategic interest, and had formulated fresh demands for GE Chief Executive Jeff Immelt.

The decision ended weeks of suspense surrounding one of Europe’s fiercest industrial battles in years, but left open major questions about the final shape of an alliance that GE hopes will give it access to new power markets.

“The points we have raised with General Electric are precise and technical but necessary,” Montebourg told a news conference after two days of talks involving the bosses of the three suitors, President Francois Hollande and top ministers.

He said France had demanded strict conditions “guaranteeing energy independence, job creation on national territory and maintenance of decision-making centers in France.”

He said the offer from Siemens and MHI was “very serious” and that he had backed it, but that the government “had made up its mind.”

“The offers were of equal quality, but the truth is, the negotiations were much more advanced between Alstom and GE,” said an aide to Hollande.

Alstom’s board is due to decide on the deal by Monday, when GE’s binding offer will expire.

Montebourg confirmed that Alstom’s lucrative gas turbines arm will be purchased by GE and said there will be discussions on the shape of joint ventures in other energy areas ranging from renewables to nuclear.

He said that as a prerequisite to a deal and to ensure its demands are met, the French state will come in as the top shareholder in Alstom by purchasing a 20 percent stake in it from Bouygues, currently the holder of 29 percent.

However, the government and Bouygues have yet to agree on the price of the stake, sources with knowledge of the talks said. Based on Alstom’s current market capitalization, a 20 percent stake will be worth €1.7 billion ($2.3 billion).

Bouygues purchased its stake from the government in 2006 after Alstom was rescued from near-bankruptcy in 2004 through a state-backed bailout. Bouygues bought the stake for around €2 billion with the aim of creating a top player in nuclear power infrastructure.

Alstom’s sensitive nuclear activities will be held in a 50:50 venture with GE in which the French state will have a “golden share” giving it a veto, said the economy minister, a self-styled “economic patriot” from the French left.

GE will also sell its rail signaling business to Alstom as part of plans to strengthen the transport activities of the French group, maker of the famed TGV high-speed trains.

Montebourg said the signaling business was valued at “1 billion dollars or euros, I am not sure.”

The government’s active intervention in the GE-Alstom deal is “indicative of the protectionist type of environment you have to deal with when doing business in France,” said Russell Solomon, senior vice president and lead GE analyst at Moody’s. He noted, however, that GE, which employs some 10,000 people in France, is already very familiar with the business environment there, and “they know what needs to be done to get the regulator comfortable.”

Alstom suffered more than bigger rivals from the 2008 economic crisis, which depressed electricity demand and caused a slump in the market for new power plant equipment.

Its assets are valuable to rivals slugging it out in a tough market. Linking up with Alstom will allow GE to provide turbines for power stations and technology for electricity grids, something Siemens, eyeing Alstom’s high-margin gas turbines for itself, and MHI wanted to prevent because it makes their U.S. rival even stronger.

Analysts said Siemens still stands to benefit, as the deal removes a competitor that has been pushing down prices in a bid to increase its business. Alstom is the No. 3 player in gas turbines, after GE and Siemens.

Hollande’s government blocked GE’s initial advances on Alstom two months ago and forced it to improve its offer by encouraging Siemens to enter the fray and giving itself the power to block industrial tie-ups in strategic areas.