Caisse investing US$1.5 billion in Bombardier for stake in rail business

Caisse investing US$1.5 billion in Bombardier for stake in rail business

Main pic: Main pic: Main pic: A plane comes in for a landing at a Bombardier plant in Montreal, Thursday, May 14, 2015. THE CANADIAN PRESS/Ryan Remiorz. 

MONTREAL — Weeks after receiving a cash infusion from the Quebec government, Bombardier has signed a deal that will see the province’s pension fund manager invest US$1.5 billion for a minority stake in the company’s rail business.

Under the agreement, the Caisse de depot et placement du Quebec will receive shares that will be convertible into a 30 per cent stake in a newly created holding company for Bombardier Transportation.

Bombardier (TSX:BBD.B) says the deal concludes its review of options for Bombardier Transportation, which sells subway cars and other mass transit systems. The company had considered spinning off the stake in a public offering and was rumoured to have been approached by Chinese railways.

“This investment by CDPQ, which has a long history as one of our major investors, is a testimonial to the growth potential of the rail industry and to Bombardier’s leadership in seizing the opportunities this market offers on a global scale,” Bombardier chief executive Alain Bellemare said in a statement.

Bombardier has been struggling to complete development of its new CSeries passenger jet which is over budget and behind schedule.

Last month, the Quebec government agreed to give Bombardier US$1 billion to help complete development of the CSeries in exchange for a 49.5 per cent stake in that project. The federal government is also considering a proposal to provide its own financial assistance.

The investment announced Thursday includes terms that give the Caisse a minimum return of 9.5 per cent as well as provisions tied to the performance of Bombardier Transportation.

“The strong performance incentives that are at the heart of this transaction and management’s plan to improve execution have a single focus: creating more value at Bombardier Transportation,” Caisse chief executive Michael Sabia said in a statement.

If the business does better than its plan, the Caisse’s stake on conversion of its shares decreases by 2.5 per cent per year, down to a minimum of 25 per cent. The convertible shares’ minimum return also falls from 9.5 per cent to a floor of 7.5 per cent.

However, if Bombardier Transportation underperforms the Caisse’s stake on conversion of its shares will increase by 2.5 per cent per year, up to a maximum of 42.5 per cent. The convertible shares’ minimum return would increase up to 12 per cent under those circumstances.

Under the deal, Bombardier Transportation must retain least US$1.25 billion in cash. If it dips below that level, Bombardier’s board will create a special committee including three independent directors acceptable to the Caisse that will be responsible for developing an action plan to restore cash reserves.

The Caisse can trigger a public offering or sale of the holding company’s shares after five years.

The deal values the rail business at US$5 billion, which is below analyst expectations, said analyst Benoit Poirier of Desjardins Capital Markets.

“We view positively the initiatives to improve the corporate governance of Bombardier, which we believe remains one of the Street’s primary concerns,” he wrote in a report.

The new holding company will be governed independently by a new board to be composed of seven members, three of which will be named by the Caisse.

Bellemare will be chairman and Bombardier Transportation president Lutz Bertling will continue in his current role.

Analyst Walter Spracklin of RBC Capital Markets said the division’s value sits within his estimated range of US$5 billion to US$7 billion excluding debt.

He said the cash will raise Bombardier’s overall liquidity to US$5.2 billion and to about US$6 billion by year-end.

“We believe this is sufficient for Bombardier to reach production ramp-up of the CSeries over the next three years and is a positive for the stock,” he wrote, noting that it will retain 70 per cent of cash generate by the railway division.

On the Toronto Stock Exchange, Bombardier’s shares surged nearly 11 per cent at $1.42 in early trading.

Follow @RossMarowits on Twitter.

Ross Marowits, The Canadian Press

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