Bombardier stocks drop as investors flinch at sale of train division

Photo: The Canadian Press

The Bombardier Transport offices are seen in St-Bruno-de-Montarville, Que. on Monday, February 17, 2020. Bombardier Inc. says it has reached a US$8.2-billion deal to sell its rail business to French train giant Alstom SA. THE CANADIAN PRESS/Ryan Remiorz

MONTREAL - Bombardier Inc. saw shares drop as much as 13 per cent Tuesday after announcing the sale of its rail business to French train giant Alstom SA.

The deal would shrink the Montreal-based transportation company by more than half as it focuses solely on making private business jets.

If approved by regulators, the US$8.2-billion transaction will help Bombardier slash its hefty debt by nearly three-quarters to about US$2.5 billion, capping a five-year turnaround plan that has seen the company shed numerous assets, including its commercial airplane division.

Analysts Seth Seifman and Yilma Abebe of J.P. Morgan cited concerns about how a "pure-play bizjet" stock would fare.

"Currently, we think the equity market perceives bizjets as facing structural challenges and as unappealing from a growth perspective," they said in a research note.

While private jets often yield higher margins, the luxury industry is more cyclical than rail, where companies can tap into massive government infrastructure contracts.

"Overall industry business jet deliveries have been relatively stagnant over the past 10 years," said National Bank of Canada analyst Cameron Doerksen.

Nonetheless, he views Bombardier as "well-positioned," with annual revenue of US$7 billion and a backlog of US$14.4 billion.

Bombardier shares fell 22 cents to a low of $1.43 in late-afternoon trading on the Toronto Stock Exchange.

The acquisition by Alstom — whose stock dropped more than three per cent Tuesday — is expected to come under intense scrutiny from antitrust regulators in the European Union.

Last year, EU authorities blocked a proposed merger between Alstom and the train division of German industrial conglomerate Siemens AG, arguing the proposed tie-up would result in higher price tags on signalling systems and bullet trains.

Bombardier said its net proceeds from the sale will be US$4.2 billion to US$4.5 billion, after adjusting for liabilities including pension obligations and paying the Caisse de depot et placement du Quebec for its 32.5 per cent stake in the train division, known as Bombardier Transportation. The proceeds include US$550 million worth of Alstom shares.

The deal makes the Caisse Alstom's single largest shareholder, converting the Quebec pension giant's investment in Bombardier Transportation into Alstom shares worth up to $3 billion, on top of an additional Caisse investment of $1 billion to hand it an 18 per cent stake in the Paris-based company.

The deal is expected to close in the first half of 2021 if it can overcome regulatory hurdles.