Bombardier to sell train unit to France’s Alstom, shedding biggest division
By Christopher Reynolds
February 18, 2020
By Christopher Reynolds
MONTREAL – Bombardier Inc. has reached a US$8.2-billion deal to sell its rail business to French rail giant Alstom SA, narrowing the Quebec company’s focus to business jets while casting off its largest division to help pay down US$9.3 billion in debt.
The sale, announced Monday, once again shrinks a company that a year ago boasted three major divisions – planes, trains and business jets – leaving it with just one at the end of a five-year turnaround that one analyst said looks “more like an asset liquidation.”
“We wanted to ensure we would have the right tools to deleverage the business, and this is what we’re announcing today,” CEO Alain Bellemare told analysts on a conference call Monday afternoon.
Asked if he might consider selling the business jet division, Bellemare replied: “The answer is no. We’ve completed the turnaround.”
The acquisition also signals an effort by Alstom to scale up amid rising competition from China’s state-owned CRRC, the world’s largest train maker.
The transaction will see the Caisse de depot et placement, which owns a 32.5 per cent stake in Bombardier’s train division, become Alstom’s largest shareholder.
The deal converts the Quebec pension giant’s investment in Bombardier Transportation into Alstom shares, handing the Caisse about 18 per cent of the Paris-based company with an investment of up to $4 billion, depending on closing conditions. The transaction includes an additional Caisse investment of $1 billion.
The deal is expected to close in the first half of 2021 if it can move through regulatory hurdles.
Alstom’s purchase is expected to come under intense scrutiny from antitrust regulators in the European Union. Last year, EU authorities blocked a proposed merger between Alstom and the train division of German industrial conglomerate Siemens AG, arguing the proposed tie-up would result in higher price tags on signalling systems and bullet trains.
Bombardier has sold several divisions since Bellemare took the helm in 2015, including its turboprop and aerostructure segments as well as its commercial airline unit, once touted as the company’s crown jewel.
The Montreal-based company announced last month it was working to reduce debt and pursuing strategic options, which analysts and other observers suggested could include the sale of the company’s rail or business jet units.
Bombardier shares have fallen about 70 per cent since July 2018 while Alstom’s have risen by more than 50 per cent over the past two years, including 3.5 per cent Monday.
The announcement was made after the Paris Stock Exchange closed Monday. The Toronto Stock Exchange was closed for Family Day.
Under the memorandum of understanding, Alstom will establish a headquarters for the Americas in Montreal. It will also launch a design and engineering centre to focus on sustainable transportation.
“Let us hope that this is the last chapter of restructuring at Bombardier,” said David Chartrand, Quebec co-ordinator for the International Association of Machinists and Aerospace Workers. “It seems that the storm is behind us.”
Quebec Economy Minister Pierre Fitzgibbon called the deal “excellent news” for Quebec workers.
“North America is waking up, both Quebec and the United States,” he said, referring to rail markets and emphasizing the protection offered by a bigger employer.
The new deal and other recent transactions will leave Bombardier with between US$6.5 and US$7 billion of cash on hand, “putting the company on a brand-new footing” to deal with its sizable debt, Bellemare said.
Net proceeds from the deal will be between US$4.2 billion and US$4.5 billion after deducting the Caisse’s equity position of roughly US$2.2 billion, as well as adjustments for debts and other liabilities, he said.
The company has already ramped up production of high-margin business jets, which it expects will drive double-digit revenue growth with 160 unit sales in 2020 amid a $16.3-billion backlog. But delays and “some volatility” continue to plague several “large, challenging” rail contracts, Bellemare said last Thursday.
While its business jets are now at full production, analysts have highlighted the cyclical luxury market of private planes in comparison to the relatively stable field of rail car and network construction, which is fuelled by government infrastructure projects.
Nonetheless, hefty production costs and lower margins remain an issue in the rail business, said Jacques Roy, professor of transport management at HEC Montreal business school.
“You can see the fixed costs increasing all the time, because they pretty much have to establish facilities everywhere they sell equipment,” Roy said, pointing to Bombardier’s plant in Plattsburgh, N.Y., which makes trains for U.S. clients.
“If they were a little bit better at this they would be able to compete with the Chinese. They could brag that, ‘Okay, we’re not as cheap as the Chinese, but we produce much better quality, we deliver on time.’ But they don’t. That’s a concern to me,” he said.
The rail and business jet divisions represent Bombardier’s only remaining revenue streams – about 53 per cent and 47 per cent, respectively, of $15.76 billion in revenue last year – after Bombardier sold its waterbomber unit, Q400 turboprop business, CRJ regional jet program and flight-training enterprise over the past four years.
And last week, Bombardier announced the sale of its remaining stake in the A220 commercial jetliner program – formerly known as the C Series – as it reported quarterly results last Thursday, marking the end of its failed bid to take on the commercial aircraft duopoly of Airbus SE and Boeing Co.
Bombardier, founded in Valcourt, Que., in 1942 as a snowmobile manufacturer, now stares down a US$9.32-billion debt load – nearly 60 per cent of it due within five years.
The rail business, Bombardier Transportation, is based in Berlin. It employs some 1,000 workers in Canada at factories in Quebec’s Bas-St-Laurent region and in St-Bruno-de-Montarville, on Montreal’s South Shore.
The deal adds Bombardier’s US$35.8-billion backlog to Alstom’s $45.3 billion list of rail orders and doubles Alstom’s revenue to nearly $US17 billion.