Bombardier to sell train unit to Alstom for US$8.2B, shedding biggest division

By Christopher Reynolds, The Canadian Press on February 17, 2020.

Bombardier Inc. says it is in talks over a potential deal to sell its rail business to French train giant Alstom SA. Flags fly outside a Bombardier plant in Montreal on May 14, 2015. THE CANADIAN PRESS/Ryan Remiorz

MONTREAL - Bombardier Inc. has reached a US£8.2-billion deal to sell its rail business to French train giant Alstom SA, narrowing the plane-and-train maker's focus as it commits itself solely to business jets while casting off its largest division in part to help pay down US£9.3 billion in debt.

"Going forward, we will focus all our capital, energy and resources on accelerating growth and driving margin expansion in our market-leading US£7 billion business aircraft franchise," CEO Alain Bellemare said in a statement Monday. The acquisition also signals an effort by Alstom to scale up amid rising competition from ChinaaEUR(TM)s state-owned CRRC, the worldaEUR(TM)s largest train maker. The transaction will see the Caisse de depot et placement, which owns a 32.5 per cent stake in BombardieraEUR(TM)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. Bombardier 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.

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.

Montreal-based 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 companyaEUR(TM)s crown jewel. Bombardier 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. 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.

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 highlight 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.

In Canada, it employs some 1,000 workers at factories in Quebec's Bas-St-Laurent region and in St-Bruno-de-Montarville, on Montreal's South Shore. This report by The Canadian Press was first published on Feb.

17, 2020. Companies in this story: (TSX:BBD.B)

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