Caisse returns in Bombardier deal sweet

Quebec’s pension fund has been guaranteed “bond-like protection with the upside of equity” in exchange for a US$1.5-billion investment in Bombardier Inc.’s train-making business.

The deal, announced Thursday, gives Bombardier a “nice safety net” while also guaranteeing a healthy minimum annual return of 9.5 per cent for the Caisse de dépôt et placement du Québec.

Scrapping plans to do an IPO of its transportation division, Bombardier announced that it will instead move the unit into a separate holding company, with the Caisse taking a 30 per cent stake in a transaction that values the business at US$5 billion.

CEO Alain Bellemare called the deal a “big milestone” that will give Bombardier the financial cushion it needs to complete development of the troubled CSeries jetliner, as well as two new ultra-long-range business jets.

“Today, this addition of $1.5 billion is further strengthening our liquidity position and de-risking our cash position moving forward,” Bellemare said.

“We have a safety net, and what that allows us to do is not only know that we’re going to be able to bring our programs to market but we’ll also re-establish confidence with our clients, which is key if we want to continue to sell our products,” he added in French.

Following on the heels of last month’s US$1-billion lifeline from the Quebec government in exchange for a 49.5 per cent stake in the CSeries, Bombardier will now have US$6.5 billion in liquidity at the end of the year, Bellemare said.

Investors seemed unimpressed with the deal. Bombardier shares were unchanged at $1.28.

Caisse CEO Michael Sabia said Bombardier Transportation is “a solid business with an impressive backlog,” a strong presence in emerging markets, a global manufacturing footprint and room for significant growth.

“Obviously there’s still a lot of work to do, that’s no secret,” Sabia said Thursday.

“We’re convinced that Bombardier Transportation is a good business. Our goal in working with Alain and his team is to make this good business into a really great business.”

The Caisse has built significant protections into the deal. Under the terms of the transaction, the pension fund is entitled to a minimum annual return of 9.5 per cent, which may decline to 7.5 per cent if Bombardier outperforms its business plan. If Bombardier underperforms its business plan, the minimum return could rise as high as 12 per cent.

The Caisse will also have approval rights over key decisions and three of seven seats on Bombardier Transportation’s board.