Alsthom set for pounds 4bn float in GEC shake-up

George Simpson, managing director of GEC, yesterday unveiled his long- awaited strategic overhaul of the group, signalling plans to float the power engineering joint venture GEC Alsthom and use its legendary cash pile to catapult Marconi up the world league of defence contractors through a series of takeovers and mergers.

The flotation of GEC Alsthom, co-owned with the French electronics giant Alcatel, would take the form of a demerger and would spell the end of GEC's strategy of expansion through joint ventures, pioneered by its former managing director, Lord Weinstock.

GEC Alsthom, which supplies power stations and rail rolling stock such as the Eurostar fleet of cross-Channel trains, is valued at around pounds 4bn and was one of a series of joint ventures created in the 1980s as a means of making GEC bid-proof.

However, Serge Tchuruk, chairman of Alcatel Alsthom, appeared to strike a more cautious note in Paris, saying he wanted to see GEC Alsthom developed rather than demerged. Mr Tchuruk said he wanted a more detailed analysis of Mr Simpson's proposals before deciding on the future of the joint venture.

Under the new strategy, to be implemented over the next three to four years, GEC will be focused around three businesses spearheaded by defence electronics, while large parts of its UK industrial division led by the semiconductor business, GPS, will be disposed of.

The other two legs to the group will be telecommunications, where GEC has a 60 per cent stake in the GPT joint venture with Siemens of Germany, and industrial electronics, which includes the Picker medical imaging business, Gilbarco fuel pumps and Videojet, an ink jet marking company.

Despite the scale of the "radical change" outlined by Mr Simpson, there was some disappointment the announcement was not accompanied by news of an actual defence merger and GEC shares fell sharply to close 24.5p lower at 353p.

The strategic review follows sweeping changes in the way the group is managed and run and a clearout at board level which will be completed in the first quarter of next year with the appointment of a new chairman to succeed Lord Prior.

In defence electronics, the prize remains a merger between Marconi and Thomson CFS of France to create a grouping with sales of nearly pounds 6bn capable of competing head on with US behemoths Raytheon and Lockheed-Martin.

But Mr Simpson said another possible route forward was the much-rumoured domestic merger with British Aerospace. Other merger or takeover candidates include Siemens Defence and Finmeccanica of Italy, which owns Alenia Defence Electronics, although GEC stressed yesterday it was not in talks to take a controlling stake in the Italian group.

The expansion of Marconi to the point where defence electronics accounts for more than half annual revenues, which amount to pounds 11bn, will be financed with GEC's pounds 2bn cash pile but Mr Simpson said he would be quite prepared to take on borrowings to achieve his goals. Any surplus capital arising from the disposal programme would be returned to shareholders, he added.

There had been speculation that GEC might unravel its joint telecoms venture, GPT, or reduce its controlling stake.

But Mr Simpson paid tribute to the double-digit margins the business was achieving and said GEC and Siemens had agreed to "reposition" the business.

Mr Simpson paid tribute to the "strong cost control culture" that his predecessor had imbued in the business, and the strong balance sheet and solid platform he had inherited.

But he went on: "Despite the strength of this opening position and the undoubted solidity of the platform, I believe that GEC has reached the stage in its development when it needs to transform itself through a process of radical change."

This, he said, was necessary to compete in increasingly tough markets, notably in defence and telecoms, and to create greater value for shareholders.

Mr Simpson made a pointed reference to GEC's balance sheet being too strong in the eyes of some, noting that its shares had outperformed the market only four times in the past 15 years while earnings per share growth had lagged behind the market average.

It has also emerged that Lord Weinstock, who now holds the title of chairman emeritus, will not have any office space when GEC moves from its Stanhope Gate headquarters in Mayfair early next year to premises just off Berkeley Square.

Analysts were split on Mr Simpson's announcement. One said: "Sometimes it is better to travel than to arrive. GEC revealed more than I'd expected but others had obviously expected concrete deals and did not get them." Another said he was underwhelmed by the review.

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