Paul Soubry, president and CEO of bus manufacturer New Flyer Industries in Winnipeg.Ian McCausland
New Flyer Industries Inc. knows the heavy-duty bus market well, but when the recession tightened pockets of its big U.S. government customers the company knew it had to make some major changes.
On Wednesday, New Flyer surprised the market with an investment from the world's second-largest bus maker, bringing it one step closer to being the diversified, full-service bus manufacturer it badly wants to be.
That player was Brazil-based Marcopolo SA, which will acquire a 20 per cent stake worth $116-million in Winnipeg-based New Flyer. The company's shares rose more than 5 per cent on Thursday.
Chris Murray, an analyst at PI Financial Corp., views the move positively, and said it will free up a meaningful amount of capital for New Flyer. "Within the next year you should expect to see a number of strategic acquisitions that gives them some sort of benefit," he said.
This represents a real change of direction for the Canadian bus maker, which struggled through the recession when government buyers of transit buses clamped down on spending. Then there was the high loonie, which ate into profits, and staffing issues that emerged.
"As we saw, when we were dealing with only government customers, and when the economy goes for some real challenges, and government funding's under pressure, we found ourselves very vulnerable," New Flyer chief executive officer Paul Soubry said in an investor call Thursday.
New Flyer needed to diversify, but the direction wasn't clear. Should the company push out internationally? Vertically integrate? Expand its product line? The cyclical spikes in demand made it hard to run a flat, efficient production system.
When Marcopolo approached New Flyer about one year ago about teaming up to build on each other's strengths and share technical, sourcing and operational costs, New Flyer saw an opportunity.
And Marcopolo is no stranger to team work. It has built itself up by taking majority and minority positions in international suppliers. It's co-ordinated joint ventures with companies such as Daimler, Tata Motors and Volvo. With net revenue of just under $2-billion in 2012, Marcopolo has been focused on pushing into emerging markets over the last decade. It now has 7 per cent to 8 per cent of the global bus market and is ready to enter North America.
In Marcopolo, New Flyer will gain access to a variety of product lines and, of course, an international presence. It also gets a bus load of capital it can use toward mergers and acquisitions at what is likely a more favourable price than dipping into the capital markets.
While the company was tight-lipped about M&A potential on Thursday's investor call, it did acknowledge the possibility. New Flyer could use the funds to buy a parts supplier, for example.
The move could even pave the way to a bigger consolidation effort, Mr. Murray said. "Down the road, as Marcopolo gets to be more knowledgeable about the company in the North American market, it opens a possibility that owning New Flyer outright is a good idea."
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)