It's the end of the line for Bombardier Transportation as Alstom buys train-making business

An exit from trains will leave Bombardier, which once prided itself on its "premium diversification," with just one unit: private jets.

It's the end of the line for Bombardier's five-decade involvement in train-making. Bombardier has agreed to sell its train-making business to France's Alstom SA in a deal that values the unit at US£8.2 billion. Proceeds will go toward debt pay down, Bombardier said in a statement Monday.

The company said it "will evaluate the most efficient debt reduction strategies. Alstom will also acquire the Caisse de depot et placement du Quebec's minority stake in Bombardier Transportation, according to the statement. Having racked up more than £9.3 billion in long-term debt, Bombardier said Thursday it was looking at "strategic options to accelerate the deleveraging of the business" even after selling its minority stake in the A220 jetliner program to Airbus SE[1].

An exit from trains will leave Bombardier, which once prided itself on its "premium diversification," with just one unit -- private jets[2], which have traditionally been its most profitable line of business. A rail combination with Alstom will likely face "significant antitrust scrutiny, which could delay the completion of a transaction," Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, said in a recent note to clients. Alstom's offer for Bombardier Transportation is worth more than US£7 billion, the Wall Street Journal reported Sunday, citing unidentified people familiar with the matter.

Bombardier owns 68.5 per cent of the unit, while the Caisse de depot et placement du Quebec controls the remainder. The Caisse paid US£1.5 billion in 2016 for its stake in Bombardier Transportation, which carries a guaranteed annual return of 15 per cent. The partners injected a combined 150 million euros in the rail venture in September, Bombardier said Thursday in a filing.

The cash infusion "supports Transportation's production ramp-up and associated working capital investment," Bombardier said. Bombardier is one of the world's biggest makers of rail equipment, with a lineup that features high-speed trains, subway cars, tramways and signalling systems. Headquartered in Berlin, Bombardier Transportation had more than 1,500 Quebec employees as of the end of last year.

It operates a factory in La Pocatiere, as well as an engineering centre in St-Bruno. Bombardier Transportation had revenue of US£8.3 billion last year, and the company expects the figure will climb to US£9.5 billion in 2020. It has £35.8 billion of future contracts in its backlog and 36,050 employees.

The unit has been beset by software and quality issues on a series of so-called "legacy" contracts in Europe and the U.S. over the last several years, forcing Bombardier to incur additional costs and pay late-delivery penalties. Bombardier's fourth-quarter results, released Thursday, included a charge of £350 million related to the London Overground and SBB contracts, as well as increased manufacturing costs for projects in Germany. Bombardier said last week it expects legacy projects to be "largely completed" by the end of 2020. "At that time, Transportation's full earnings and cash generation ability will become clear as we reap the benefits of our refreshed product portfolio, higher-margin backlog and solid growth fundamentals," the company said Feb.

13. Various Bombardier train executives over the years have attempted to simplify production though more selective bidding, greater standardization and centralized procurement. Bombardier Transportation booked a record £10 billion of new business last year, with almost 70 per cent of the contracts tied to service contracts, signalling projects, "high reuse" platforms and options on existing rolling stock contracts -- which Bombardier says carry "much lower execution risk."

[email protected][3]

Related

Quebec, James Bay Cree announce £4.7-billion development deal[4]

References

  1. ^ the A220 jetliner program to Airbus SE (montrealgazette.com)
  2. ^ private jets (montrealgazette.com)
  3. ^ [email protected] (montrealgazette.com)
  4. ^ Quebec, James Bay Cree announce £4.7-billion development deal (montrealgazette.com)

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