Bombardier Inc.’s financial prospects have been quietly taking flight, and if Bay Street bankers have it right, the Caisse de dépôt et placement du Québec is planning to cash in a winning wager on the transportation company.
Bombardier’s stock price has doubled over the past year; a company that a few years ago was on the financial brink suddenly finds itself flush with cash. The change bodes well for the Caisse, which profitably exited a number of successful investments in Quebec-based companies in recent weeks, as the fund owns a 27.5-per-cent stake in Bombardier Transportation, the train-making division of the Montreal company.
The Caisse’s stake dates back three years, to a time when Bombardier was deep in debt, pouring money in the C Series jetliner program and facing a liquidity crisis. Fast forward to today, and Bombardier has a large reserve of cash, courtesy of moves such as this month’s US$635-million sale of its Downsview property in Toronto. CIBC World Markets Inc. analyst Kevin Chiang forecasts that by year end, Bombardier will be sitting on up to US$4-billion, with no clear use for up to US$2-billion of that stash.
“We believe the two most obvious uses for this cash are to begin paying down debt (US$850 million due in 2020) or begin contemplating reacquiring the Caisse’s 27.5 per cent interest” in BT, Mr. Chiang wrote in a recent report. He said: “It has been a long time since investors did not have to worry about Bombardier’s liquidity position.”
The Caisse and Bombardier declined last week to comment on their plans for Bombardier Transportation. However, investment bankers who work with the two organizations said the Caisse and Bombardier are already reviewing their options for the fund’s stake, as both sides have compelling reasons to wind up the partnership.
For Caisse chief executive Michael Sabia, who took over in 2009 after the fund manager took a beating in the global financial crisis, exiting this investment with a tidy profit would satisfy the fund’s two sometimes contradictory goals.
The Caisse was set up 53 years ago by the Quebec government with a unique dual mandate, seeking to maximize returns, while at the same time ensuring the province’s future prosperity. In the past, Caisse executives have occasionally been guilty of backing hometown heroes to keep the politicians happy, rather than making smart investments.
On Mr. Sabia’s watch, fulfilling the dual mandate meant investing in growth strategies at leading Quebec companies, where the Caisse has unmatched market intelligence, while taking the opportunity to harvest capital from successful investments within the province. That capital can then be redeployed in opportunities around the world. Over the past five years, the approach generated a benchmark-beating 10.2-per-cent annual return for a fund that now holds $298-billion in assets. Of that total, $192-billion is invested outside Canada.
This month, the Caisse opted to cash in a pair of winning wagers within Quebec. The fund sold the final portion of its stake in Quebecor Media Inc., first acquired 18 years ago, back to parent Quebecor Inc. for $1.69-billion. After weathering rough patches along the way, the Caisse ended up making approximately $1-billion on the investment.
The Caisse also pocketed $273-million by selling shares in tech firm CGI Group Inc. back to the company. Montreal-based CGI‘s stock price more than doubled in the past five years, and the Caisse continues to hold a 15-per-cent stake that’s worth more than $3-billion.
At Bombardier Transportation, the Caisse is already sitting on a significant win. When the fund put up US$1.5-billion for a 30-per-cent stake, the deal valued the division at US$5-billion. CIBC’s Kevin Chiang now estimates Bombardier Transport is worth at least US$5.8-billion – the backlog of orders for railway equipment has never been stronger.
In addition, as part of the deal three years ago, the Caisse received warrants on 106 million shares in the parent company. The rise in Bombardier's stock since the warrants were granted means the Caisse now holds a stake in the company worth more than $210-million. One strategy being pushed by investment bankers would see the Quebec fund exit its position in the transportation unit while holding on to the warrants.
From Bombardier’s point of view, buying out the Caisse makes financial sense. The original cash injection, done when the company was desperate for money, now qualifies as extremely expensive capital. Bombardier guaranteed the Caisse a minimum 9.5-per-cent annual return. Under certain circumstances, the Caisse’s guaranteed return jumps to 15 per cent. Buying out the Caisse with its excess cash would translate into significant savings for Bombardier.
At times, the two have been uneasy partners. In 2017, the Caisse withheld its vote for Bombardier chairman Pierre Beaudoin in a row over the company’s governance. The Caisse also cast its shares against the company’s executive-compensation plan that year.
Bombardier also felt the sting earlier this year when it lost the bidding for a lucrative contract from the Caisse-led Montreal light rail project. It was awarded instead to a consortium that included France’s Alstom SA.
And the Caisse can’t have been too happy with a string of headlines resulting from The Globe and Mail’s investigations into Bombardier Transportation’s activities around the world. Among other things, those stories have exposed the company’s dealings with some nasty people tied to President Vladimir Putin’s regime in Russia. A bribery case involving Bombardier Transportation employees has played out in the courts in Sweden, where it makes rail equipment.
Bombardier has the formal right to cash out the Caisse in February, on the third anniversary of the closing of a deal that kept Bombardier Inc. on the rails (and helped keep it out of bankruptcy protection). Flush for the first time in recent memory, watch for Bombardier to make use of that opportunity. For Mr. Sabia, a profitable exit from another homegrown success story at Bombardier would burnish the Caisse’s credentials as a Quebec champion with global ambitions.