Slumping freight rail sales force Wabtec to revise deal
Faively acquisition terms are changed
A boon to Wabtec Corp.’s business as recently as last year, the freight rail industry will drag down the Wilmerding company’s earnings more than expected in 2016, company executives acknowledged Tuesday.
The manufacturer of products for the freight rail and passenger transit industries reported a 17 percent drop in third-quarter profits. Compared with a year ago, revenue from freight sales is down 29 percent, while sales to passenger transit systems are up 4 percent.
The change in fortunes has forced Wabtec to revise the terms of its long-anticipated acquisition of Faiveley Transport, a French rail products manufacturer with revenues of $1.2 billion and 5,700 employees
Wabtec is now giving the Faiveley family the option to receive as much as 45 percent of the purchase in cash, the executives said.
In the original deal announced in July 2015, Faiveley was to receive 25 percent of the purchase price in cash, while the rest of would be paid in Wabtec stock valued at 100 euros a share, or roughly $109 a share.
The total purchase price of $1.8 billion has not changed.
The revised deal “reflects that the reality of the economics of the original transaction has changed,” said Albert Neupaver, Wabtec’s executive chairman on an earnings call Tuesday with analysts. Because “the Faiveley family (is) receiving less value due to the decrease in our stock price, we renegotiated the original deal.”
Additionally, the company said it expects to complete the purchase of Faiveley shares in November, extending the timeline to Dec. 31. Wabtec has the option to further extend the timeline to March 31, 2017.
Earlier this month, the company announced the deal had been approved by the European Commission on the condition that the merged company divest Faiveley Transport Gennevilliers, a brake materials business worth about $13 million.
The deal was first proposed during a high point for Wabtec.
During 2015, Wabtec’s freight rail business segment — including products like locomotive engines, freight cars, signaling and positive train control systems — grew sales by 19 percent. That more than offset a 5 percent decline in sales in its passenger rail segment.
Shortly after the proposed acquisition was announced, Wabtec's stock hit $101 a share, near an all-time high.
Wabtec’s stock closed at $78.61 on Tuesday, down about 4 percent.
The company’s earnings this year have been dragging as revenue from freight sales has evaporated. On Tuesday, Wabtec reported profits of $82.4 million for the three months ended Sept. 30, compared with $99.2 million during the yearago quarter. The company reported earnings per share of 91 cents, compared with $1.02 a share during the the same period last year.
Along with the report, it adjusted its 2016 earnings guidance to between $4 and $4.04 a share, compared with guidance issued last year of $4.30 to $4.50 per share.
In the call with analysts, executives blamed the lower earnings on a cutback in spending by freight railroads. Freight rail traffic during the first three quarters of this year was down nearly 11 percent, according to data from the Association of American Railroads.
Fewer carloads on the rails means less demand for aftermarket parts and repair. In particular, railroads are hauling far less coal — a heavy commodity that wears down rail infrastructure.
“Our transit business continues to perform well, while the freight markets remain challenging due to overall rail industry conditions and the sluggish global economy,” said Raymond T. Betler, Wabtec’s president and chief executive officer. “In this environment, we will stay focused on what we can control.”
Mr. Betler said the company doesn’t expect traffic in heavy-haul commodities like coal to recover. “That was a big aftermarket revenue generator for us.”
Wabtec executives were confident freight rail sales would bounce back in the long-term. They also see potential for revenue from a backlog of passenger transit projects, which in the third quarter made up 46 percent of total sales.