FINANCIAL POST
Bombardier gets ‘nice safety net’ in US$1.5B deal with Caisse.
Quebec’s pension fund has been guaranteed “bond- like protection with the upside of equity” in exchange for a US$ 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- longrange 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 on a conference call with analysts and media.
“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$6.5 billion in liquidity at the end of the year, Bellemare said.
Investors seemed unimpressed with the deal, and though shares fell early on Thursday they closed with no change on the day .
Caisse CEO Michael Sabia said Bombardier Transportation is “a solid business with an i mpressive backlog,” a strong presence in emerging markets, a global manufacturing footprint and room for significant growth.
“Obviously there’s still a lot of work to do, that’s no secret,” Sabia said Thursday.
“We’re c onvinced t hat Bombardier Transportation is a good business. Our goal in working with Alain and his team is to make this good business into a really great business.”
The Caisse has built significant protections into the deal. Under the terms of the transaction, the pension fund is entitled to a minimum annual return of 9.5 per cent, which may decline to 7.5 per cent if Bombardier outperforms its business plan. If Bombardier underperforms its business plan, the minimum return could rise as high as 12 per cent.
The Caisse will also have approval rights over key decisions and three of seven seats on Bombardier Transportation’s board. Bombardier has the right to buy out the Caisse’s stake after three years, but will have to pay it a minimum 15- per- cent annual compounded return to do so.
Bombardier has also agreed to maintain a minimum cash threshold of US$ 1.25 billion. If it falls below that level, the Caisse will have significant say in how to restore the company’s cash reserves.
“We very much liked the risk-return profile of the transportation business and we especially liked the risk- return profile of this pretty highly structured transaction that we announced today,” Sabia said, describing it as having “bond-like protection with the upside of equity.”
Sabia added that the Caisse, thought to be a potential partner to the Quebec government’s investment in the CSeries, is not interested in the aerospace side of the company.
“I can categorically tell you that la Caisse de dépôt did not consider at any point participating in the investment that the Government of Quebec has made in the CSeries. That was not part of our game plan,” he said.
“Our motivation here is investing in a global, resilient, cash- flow- generating transportation business that we like a lot.”
Macquarie analyst Konark Gupta said Thursday’s deal “comes at the expense of the shareholders,” as the Caisse will also get 106 million warrants, equal to 4.7 per cent of Bombardier’s outstanding Class B shares.
Gupta added that Bombardier’s “leverage ratio is still high, free-cash-flow outlook is negative and valuation is rich versus its peers.”
The company has said it needs to spend another US$2 billion on the CSeries program before it reaches positive cash flow, and it’s also ramping up spending on the Global 7000 and 8000 business jets at a time when demand for many of its products is slowing.
Credit-rating agency DBRS said liquidity for the next 12 months “appears adequate” but Bombardier “continues to face significant operational challenges,” including a sales drought for the CSeries, a soft business-jet market and a high rate of cash burn.