Caisse’s losses mount as Alstom goes off the rails

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Something has gone seriously off the rails at Alstom SA ALSMY, the giant French train maker that bought Bombardier’s rolling stock business in 2021 and counts Caisse de dépôt et placement du Québec as its biggest shareholder. Investors have bailed as Alstom burns through cash amid repeated delays in fulfilling contracts and bringing Bombardier’s factories up to speed with its own.

Alstom’s stock posted the largest single-day drop of any listing on the Paris Stock Exchange’s CAC 40 index in 17 years when it plunged by 38 per cent on Oct. 5, after the company announced preliminary first-half financial results showing negative free cash flow of €1.15-billion ($1.67-billion) during the six months to Sept. 30. The share price has slid a further 8 per cent since.

After previously projecting “significantly positive” full-year free cash flow, Alstom now expects to post negative free cash flow of between €500-million and €750-million for the 2023-24 fiscal year that ends next March 31. Alstom has been using up more cash to purchase inventories of manufacturing materials while delays in delivering trains to clients has reduced cash inflows. A massive contract it inherited from Bombardier Transportation (BT) to supply 443 Aventra trains to British rail operators has been a huge drag on Alstom’s performance.

The recent stock rout pushes the overall decline in Alstom’s share price to more than 70 per cent since it bought Berlin-based BT nearly three years ago. Alstom took the train maker off its Montreal-based parent’s hands as the latter divested of key assets to slash its debt. At the time, the Caisse converted its one-third ownership stake in BT into Alstom shares, leaving the Quebec pension fund manager with 17.5 per cent of the merged entity.

The Caisse has seen the value of its more than 66 million shares in Alstom shrink to less than $1.2-billion from $4-billion. Speculation that Alstom could be forced to raise new capital to shore up its balance sheet continues to weigh heavily on its share price. And the company could also lose its investment-grade crediting rating.

Moody’s had already downgraded Alstom’s long-term debt to Baa3 from Baa2 in May after the company pushed back its target date for achieving EBITA (earnings before interest, taxes and amortization) of 8 per cent by one year to 2026. On Oct. 12, Moody’s changed its outlook on the rating to negative from stable. A rating cut would push Alstom’s debt into the speculative, or “junk,” category.

“The recent negative [free cash flow] development highlights the complexity of Alstom’s operations, in part reflecting the nature of the business, in addition to the ongoing challenges related to the integration of BT and the delivery of its outstanding loss-making contracts, which continue to entail execution risks,” Moody’s said.

The move to roll the Caisse’s BT stake into Alstom was the last big transaction negotiated by former Caisse chief executive Michael Sabia. The deal was announced just days after Mr. Sabia handed the reins to current Caisse CEO Charles Émond in 2020. It took nearly a full year to win the approval of European competition authorities. The EU had previously blocked a proposed merger between Alstom and German rival Siemens AG. Bombardier had also held merger talks with Siemens.

A Caisse spokesperson refused to say to whether the pension fund manager is seeking changes at Alstom in the wake of the recent string of bad news. Alstom CEO Henri Poupart-Lafarge, who took over in 2016, did not participate in the Oct. 4 conference call to discuss the blockbuster (in a bad way) announcement of the ballooning cash drain, raising eyebrows among analysts. He left it to Alstom’s recently named chief financial officer, Bernard Delpit, to take questions.

The pension fund manager has two representatives on Alstom’s board of directors: Caisse executive vice-president, Kim Thomassin, has sat on the board since the BT deal closed. The Caisse chose Jay Walder, a McKinsey & Co. senior adviser and former head of New York’s Metropolitan Transportation Authority, to replace Serge Godin on the board after the CGI Group executive chairman stepped down in July.

“We are closely following [Alstom’s] work to rectify the situation in the coming months,” Caisse spokesperson Kate Monfette said in an e-mail. “We nevertheless maintain a strong belief in our investment in Alstom for the long term – and more specifically in the sustainable transportation sector, which plays an essential role in the climate challenge and offers our depositors a solid platform for future growth.”

Still, the market capitalization of Siemens stands at more than €102-billion, while Alstom’s has sunk to barely €4.6-billion. Whether Siemens could have done a better job integrating BT’s business may be moot now. Both Alstom and Siemens, respectively the world’s second- and third-largest rolling stock manufacturers after China’s CRRC, face pressure from more nimble competitors such as Spain’s CAF and Japan’s Hitachi Rail.

And it looks like it could be quite a while before Alstom gets back on track.