Bombardier, Alstom shares plunge after rail sale
Some observers see upside in deal for Montreal firm while concerns emerge
PARIS/MONTREAL Shares of Alstom SA and Bombardier Inc fell on Tuesday after the French firm agreed to buy its Canadian rival’s rail division for up to 6.2 billion euros (US$6.7 billion), a deal likely to draw scrutiny from competition regulators and unions concerned about job cuts.
The cash and shares deal, announced Monday, will make the combined entity the world’s second-biggest train maker after China’s state-owned CRRC Corp. It is the latest attempt by western rail firms to try to build scale as they try to compete effectively with CRRC.
Bombardier shares fell 10.9 per cent to close at $1.47 in Toronto on Tuesday. Alstom shares closed 3.2 per cent lower at 48.70 euros in Paris.
Montreal-based Bombardier would use sale proceeds to cut its debt, which has been a concern for investors and rating agencies. Its net debt would drop to $2.5 billion once the deal closes in the first half of 2021.
But it also leaves Bombardier as the only large pure business jet maker, as opposed to rivals in aviation that also generate revenue from military sales.
“If there were a serious market downturn, they would be at a major disadvantage, since there would be no defence revenue to compensate,” said U.S. aerospace analyst Richard Aboulafia, vice-president of analysis at Teal Group.
JP Morgan analysts said there was uncertainty ahead “during a lengthy antitrust process.”
Alstom executives have sought to quell concerns about any hurdles they might face over competition issues, after EU regulators blocked its attempt to merge rail assets with Germany’s Siemens AG last year.
Alstom’s acquisition of Bombardier Transportation would give it a lower market share in signalling than the Siemens option, which had been one of the main sticking points with regulators, Alstom chief executive Henri Poupart-lafarge said on Monday.
The companies said they had already informally briefed EU antitrust regulators on the deal.
The transaction was complementary, with Bombardier more present in Northern Europe and Alstom in the south, Poupart-lafarge said, adding it would not affect jobs.
The combined groups would have some 10,000 staff, including temporary workers, in Germany, where Bombardier Transportation has its headquarters and seven factories.
France would be the second-biggest market in Europe, with some 6,730 total employees.
French trade unions were initially sanguine about the transaction, saying they were reassured by the fact Alstom was still in hiring mode at the moment and that order books were full.
Regarding job cuts, “the project, such as it has been presented to us, does not seem to be leading down that road, but we remain very vigilant,” Patrick de Cara, a representative for the CFDT union at Alstom, said.
Analysts following Bombardier were mostly positive about the deal, saying it will help the Montreal-based company address its hefty debt, while also focusing its efforts on business jets, where it has competitive offerings across a range of products.
The sale allows Bombardier “to deleverage and focus on the remaining Business Aviation franchise, where we believe the company has strong/competitive products with upside potential in operating margins and cash flow over the coming years,” said BMO Capital Markets analyst Fadi Chamoun. Bombardier’s business jet division “could be disadvantaged, however, as a standalone company competing against well-capitalized peers with lower cost of capital and could be subject to M&A down the road, in our opinion.”
CIBC analyst Kevin Chiang viewed the sale “as maybe the best solution available for Bombardier as it addresses the main issue facing the company — it has too much debt despite its strong product portfolio.”
He notes that Bombardier’s pro forma net cash will increase to a range of $6.5 billion to $7 billion from $4 billion and its pro forma debt will fall to $2.5 billion from $9.3 billion. This “supports the argument that the company can trade more in line with its peers.”
Robert Spingarn, Wall Street analyst at Credit Suisse, said the sale represents a “new dawn” for Bombardier with a more focused business and a “newly cleansed balance sheet.”
“While we are not currently highly constructive on the biz jet market due to soft demand, BBD is well positioned across the subsegments, particularly so in the most profitable large cabin segment where it only competes with Gulfstream.
“Over time, we would expect excess bizjet capacity to be absorbed, which should enable demand to improve for new jets.”