French train giant Alstom SA is sending signals that it might push for better terms in its multibillion-dollar takeover of Bombardier Inc.‘s train business after the Canadian manufacturer reported a second-quarter loss pinned on a major write-down at the rail unit.
Bombardier’s quarterly report “points to unexpected and negative developments” in its train business, especially compared with the information available before the announcement of the takeover in February, Paris-based Alstom said in a statement Monday.
Alstom said it still remains convinced of the strong strategic rationale for the takeover and is confident it can bring the Bombardier unit back to profitability in the medium term. But the company said it will “take into account the consequences” of these developments in upcoming talks with Bombardier, hinting it could seek a better price.
Under the current terms of the deal, Bombardier will sell its rail business, known as Bombardier Transportation (BT), to Alstom for up to €7.45-billion (US$8.8-billion) including debt. Alstom has agreed to pay from €5.8-billion to €6.2-billion for BT’s equity, subject to Bombardier‘s accounts at closing, and the purchase price will decrease should BT be in a negative cash position at the end of 2020.
“They’re clearly angling for a discount,” Veritas Investment Research analyst Dan Fong said of Alstom. “Unless Bombardier can right the ship, Alstom may well get a lower price.”
The sale amounts to a crucial transaction for Bombardier, which intends to use the proceeds to de-lever and emerge as a pure-play manufacturer of private business jets. It expects net proceeds of US$4.2-billion to US$4.5-billion from the sale, including US$550-million worth of Alstom stock.
The agreement now binding the two companies amounts to a memorandum of understanding. Despite this, “everything is already prenegotiated with Alstom” and things should move toward a formal agreement in September, Bombardier chief executive Éric Martel told reporters in a conference call last week.
The companies have received approval for the takeover from regulators in Europe. They still have to win clearance from regulators in other countries, including the United States and China, and backing from Alstom shareholders in a vote this fall.
Bombardier is one of the world’s largest makers of rail equipment and continues to win new orders to strengthen a US$33.7-billion backlog. But the business has been hamstrung in recent years by problems on several technically complex contracts, including deals with Germany’s Deutsche Bahn and London Overground, that have resulted in delivery delays and financial penalties from customers.
Montreal-based Bombardier took a charge of US$435-million on the train business in its latest quarter, which contributed to a net loss of US$223-million, or 13 cents per share.
The charge was related to what the company called “incremental engineering, certification and retrofit costs” on several nearly complete projects, mainly in Britain and Germany. The company also said it mandated a new team to conduct “deep dives into challenging legacy projects” to examine the excessive costs.
When he was asked last week if the charge could prompt Alstom to renegotiate the price of the takeover, Mr. Martel said there are specific mechanisms in place for various scenarios, but played down any potential impact.
“The [financial] adjustments that we made, all of that was shared with Alstom in terms of the risk when they did their due diligence,” Mr. Martel said. “Our view is that we’re pursuing the talks. And the value, for us, stays the same.”
The large majority of the impact of the adjustments – 95 per cent – is being assumed by Bombardier now, Mr. Martel said. “So, it’s not something that will necessarily have repercussions later on profitability.”
Canadian pension fund Caisse de dépôt et placement du Québec, which holds about 30 per cent of Bombardier Transportation, will convert its position into shares of Alstom under the planned takeover. Caisse will become Alstom’s largest shareholder, with about 18 per cent of the company.
“We signed an agreement with terms that take into account Bombardier Transportation’s performance up to the transaction’s closing,” Caisse spokesman Maxime Chagnon said Monday. “We will continue to work with our partners, as we intend to honour the terms of the agreement concluded with Alstom.”
Shares of Bombardier fell 2.3 per cent on Monday to close at 41.5 cents on the Toronto Stock Exchange.