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

It’s the end of the line for Bombardier Inc.’s five-decade run as a trainmaker.

Bombardier on Monday agreed to sell its majority stake in its train unit to France’s Alstom SA in a proposed transaction that values the business at about US$8.2 billion. Proceeds will go toward paying down the Montreal-based company’s $9.3 billion of long-term debt, Bombardier said. Closing is expected to take place in the first half of 2021, the companies said.

The deal will see the Caisse de dépôt et placement du Québec become Alstom’s biggest shareholder by converting its minority Bombardier Transportation holding into shares of the acquirer and making an additional investment of 700 million euros ($1 billion). As a result, the Caisse will own about 18 per cent of Alstom and control two board seats.

“It is a transformational deal for Bombardier,” chief executive officer Alain Bellemare said Monday on a conference call with financial analysts. “It marks the end of our turnaround, and the beginning of a new and bright chapter for the company. It really changes the game for us. It positions Bombardier to accelerate our deleveraging.”

The transaction — the biggest divestiture in Bombardier history — caps a dizzying drive by Bellemare to shrink a once-sprawling Quebec industrial icon. In 2014, the last full year before he became CEO, Bombardier had 73,800 employees and sales of US$20.1 billion.

In the last two years alone, Bellemare handed control of the C Series jet to Airbus SE, sold Toronto’s Downsview facility and the turboprop business, and agreed to sell the CRJ regional-jet program to Japan’s Mitsubishi Heavy Industries. In November, he struck a deal to sell the aerostructures business to Spirit AeroSystems for US$591 million. The last two transactions are expected to close by June 30.

As a pure-play maker of business jets, Bombardier will have annual revenue of about US$7 billion and 18,000 employees. The company had US$15.8 billion of revenue last year with a workforce of 60,400.

Bombardier’s biggest and priciest business jet, the Global 7500, is almost sold out through 2022, and the company has started taking orders for 2023, chief financial officer John Di Bert said in the call.

“We really like our business-aircraft business,” Bellemare said. “We have a very solid base, and we see a significant opportunity for growth and margin expansion.”

That opportunity comes with sizeable risks.

“Yes, the transaction solves a lot of issues, but business jets are highly cyclical,” Chris Murray, an AltaCorp Capital analyst in Toronto, said in a telephone interview. “You no longer have the buffer that rail provided.”

Total proceeds of the sale, after the deduction of debt-like items and liabilities such as pension obligations, are expected to be about $6.4 billion, Bombardier said Monday.

After deducting the Caisse’s equity position, which is worth as much as $2.3 billion, Bombardier would receive net proceeds of up to $4.5 billion, including $550 million of Alstom shares that will be “monetizable” after a three-month lock-up period following closing.

Alstom, like Bombardier, is one of the world’s biggest makers of rail equipment. It had a backlog of 40 billion euros as of March 2019, and annual sales of 8.1 billion euros.

Both companies have tried to get bigger in recent years to fend off increased competition from Chinese railcar maker CRRC. In 2017, Alstom and Bombardier held separate talks with Germany’s Siemens AG about combining their train operations. Siemens eventually chose to merge with Alstom, but European competition authorities rejected the deal a year ago.

This time around, Bellemare seems confident the transaction with Alstom will win antitrust approval.

“There’s a great fit between Alstom and BT,” Bellemare said on the call. “There’s very minimal overlap.”

Alstom’s acquisition of Bombardier Transportation comes with a commitment to expand its presence in Quebec and develop its activities in the Americas.

Once the deal closes, Alstom’s head of the Americas will be based in Montreal, which will serve as the headquarters for the “activities developed in the Americas.” All support functions for the Americas, such as human resources, legal and accounting services, will also be based in the province.

All told, Alstom’s Quebec-based executives will oversee more than 13,000 employees across the Americas.

In a statement that praised Alstom “for its capacity to manage and execute projects,” Caisse CEO Charles Emond said Monday the deal “strengthens the company’s global leadership in sustainable mobility. It’s an investment in a company that is well positioned to harness the growth of a promising sector, which is perfectly aligned with our strategy and will produce attractive returns for our depositors over the long term.”

Alstom already has ties to the Caisse: it’s building the railcars for the pension fund manager’s Réseau express métropolitain, having beaten out Bombardier for the order in 2018.

Quebec Premier François Legault welcomed the deal, highlighting the role played by the Caisse in securing jobs for the province.

“It is certain that I would have liked if things had turned out differently for Bombardier, because this company has occupied and will continue to occupy an important place in the Quebec economy,” Legault said in a statement. “But with the Caisse as the first shareholder of the new Alstom, we can be reassured: Quebec’s interests will always be on the company’s agenda.”

Across the ocean, French Economy Minister Bruno Le Maire expressed “delight” in a tweet at seeing Alstom play “a leading role in strengthening the European rail industry.”

Reaction on the labour front was lukewarm, with Quebec’s CSN union welcoming the end of “several months of uncertainty” while urging Alstom to quickly “clarify” its intentions with regard to Bombardier’s La Pocatière plant.

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 about 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 several years, forcing Bombardier to incur additional costs and pay late-delivery penalties.

Alstom has identified about 400 million euros of annual cost savings it can achieve after four to five years, according to a slide presentation. So-called “synergies” would come from areas such as procurement, better design and “footprint optimization” — in other words, likely plant closures.

With the sale, Bombardier is closing the book on a trainmaking adventure that began with the 1970 acquisition of Austrian scooter and tramway maker Lohnerwerke and its engine-making unit, Rotax.

The oil crisis of 1973, which forced Bombardier to halve snowmobile output, soon thrust the need to diversify to the forefront. At the time, snowmobiles accounted for 90 per cent of Bombardier’s revenue.

A year later, Bombardier had its breakthrough win: a landmark contract to build 423 subway cars for the entity now known as the Société de transport de Montréal. Several orders followed, including a marquee deal with New York’s Metropolitan Transportation Authority in 1982.

Bombardier Transportation took on a truly global dimension with the 2001 acquisition of DaimlerChrysler’s Adtranz rail unit, later moving its headquarters to Berlin.

While Bombardier gained valuable scale and technology, analysts said the deal created a series of organizational problems that took years to resolve. At the time of the deal, Adtranz was twice the size of Bombardier and had 22,000 employees.

ftomesco@postmedia.com

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Bombardier divestments since 2003

*Transaction announced but not yet closed