Alstom falls after raising €350m
ALSTOM yesterday fell the most in almost four years after a surprise ¤350m share sale raised doubts about the strength of the French train maker’s balance sheet.
ALSTOM yesterday fell the most in almost four years after a surprise ¤350m share sale raised doubts about the strength of the French train maker’s balance sheet.
Proceeds from Monday’s sale, priced at a 5.6% discount to Alstom’s prior close, will be used to fund the purchase of a stake in a Russian train maker, the company said after the close of markets. Alstom’s shares fell as much as 8.5% yesterday, the biggest intraday drop since November 2008.
“An equity raising will reignite perennial worries about Alstom’s balance sheet and cash flow,” said Martin Prozesky, an analyst at Sanford C Bernstein, in a note. “On the positive side, the deal is at a good multiple and gives Alstom earnings exposure to a growth market.”
Alstom CEO Patrick Kron pledged this year that the French maker of trains and power equipment would return to a positive free cash flow as sales rebound. The company had a cash outflow in the past two years as it invested in new plants in emerging markets to tap demand for infrastructure growth, and cut jobs in Europe and the US where utilities are reeling from the economic crisis.
Shares of Alstom, which also makes power turbines, traded 4.3% lower at ¤27 in the French capital. Before yesterday, the company gained 20% this year, valuing Alstom at about ¤8.3bn.
Yesterday’s plunge may be an overreaction on the part of investors, as the transaction was not a “distressed” sale, Mr Prozesky said.
Alstom on Monday reiterated its earnings forecast and said free cash flow should be positive in each of the next three financial years. It sold the shares at ¤26.65 apiece, the bottom of a range that extended to ¤27.50.
Alstom will use the proceeds, which represent 4.26% of its capital, mainly to finance an acquisition it announced in 2009, as well as for possible other investments in the renewable grid businesses, the company, based near Paris, said.
When newspapers including Financial Times Deutschland reported in March that Alstom was weighing an offer to buy a maker of wind turbines, Mr Kron said that he would not “harm our shareholders through adventurous deals which would imply raising equity in unfavourable conditions”.
The capital increase is “unlikely to add to confidence levels”, a Morgan Stanley analyst wrote in a report yesterday. “Our view is that this is probably excess conservatism.”
Alstom had more than ¤2bn in cash at the end of the first quarter and ¤1.4bn in an unused credit line, enough to make the remaining pay- ment for a 25% stake in Russian rail company Transmashholding (TMH) announced in March 2009.
“Although dilutive, this deal has the advantage of strengthening the group’s still fragile balance sheet, and reflects the firm trend in TMH’s earnings,” said Arnaud Schmit and Ludovic Debailleux, analysts at Natixis, in a research note.
Moody’s Investors Service cut Alstom’s long-term credit rating by one level on January 17 to Baa2, the second-lowest investment grade, and said there was the possibility of another reduction because of “material negative trends in working capital levels”.
“The market may have questions on why Alstom is doing the placement now as the TMH liability is not new and the stock had pulled back over the past two weeks,” said Andreas Willi, head of European capital goods equity research at JPMorgan Securities.
Alstom said that ¤270m from the capital increase will flow into the Russian deal. The payment is slightly higher to reflect the positive performance of the asset, it said. The company is due to report earnings for its financial first half on November 7.
Alstom reiterated its guidance yesterday of sales growth exceeding 5% for this year and the next two, as well as a “gradual improvement” of the operating margin to about 8% in March 2015. Bloomberg