The End of CDPQ's Bombardier Saga?

On Monday, CDPQ announced it has become Alstom’s largest shareholder following the announced acquisition of Bombardier Transportation:
  • CDPQ’s total investment in Alstom will amount up to €2.78 billion (CAD 4.0 billion)
  • At the transaction’s closing, CDPQ will hold around 18% of Alstom’s shares and two seats on the Board of Directors
  • Alstom strengthens its leadership in sustainable mobility, a promising sector that benefits from strong trends related to urbanization and climate change
  • Strengthened presence and growth opportunities in Québec – with headquarters for the Americas, overseeing the work of 13,000 employees
As part of Alstom’s proposed acquisition of Bombardier Transportation, Caisse de dépôt et placement du Québec (CDPQ) today announced the conclusion of an agreement with Alstom to convert its current investment in Bombardier Transportation into shares of Alstom. CDPQ also announced an additional investment of €700 million in Alstom. CDPQ’s total investment will range from €2.63B to €2.78B, depending on closing conditions. Alstom shares will be acquired by CDPQ at €44.45 per share.

With this transaction, CDPQ will become the largest shareholder of the new Alstom, with a stake of around 18% in the company, depending on financing and closing conditions. As such, CDPQ will appoint two representatives to sit on the company’s Board of Directors as well as a Board observer.

The transaction announced today is the result of a thorough analysis and discussions that started several months ago.
“The combination of Bombardier Transportation and Alstom, which is recognized for its capacity to manage and execute projects, strengthens the company’s global leadership in sustainable mobility. It’s an investment in a company that is well positioned to harness the growth of a promising sector – which is perfectly aligned with our strategy and will produce attractive returns for our depositors over the long term,” said Charles Emond, President and Chief Executive Officer of CDPQ.

“In addition to the significant potential to create value for our depositors, this transaction provides opportunities to grow and develop expertise in Québec, in a thriving sector that will benefit from urbanization in many parts of the world and growing climate change concerns,” added Mr. Emond.
The value of CDPQ’s holdings in Bombardier Transportation, which will be converted into shares of Alstom, reflects the 15% annual return set out in the initial investment structure.

In the context of its agreement with CDPQ, Alstom also announced its intention to strengthen its presence in Québec through ambitious commitments that will be implemented in the first year following the transaction’s closing. These commitments include establishing the Americas’ headquarters in Greater Montréal, where a Head of the Americas will be based; a new design and engineering centre and centre for high-tech R&D; and the expansion of activities through increased opportunities for the La Pocatière and Sorel-Tracy manufacturing facilities.

This transaction is expected to close in the first half of 2021. All the details of the transaction, which is subject to regulatory approval and the closing conditions of the agreement, are available in the news releases issued by Alstom and Bombardier Inc., available here:
HSBC acted as financial advisor, and McCarthy Tétrault LLP and Freshfields Bruckhaus Deringer LLP acted as legal advisors to CDPQ in this transaction.
This is a great deal for CDPQ, one I'm sure Charles Emond, its new president and CEO, has been working on for quite some time since he sat on the Board of Bombardier Transportation.

This is also a good deal for Alstom since it's a global leader in rail transport and with this acquisition, it's cementing its position as a global powerhouse supplying rail trains all over the world.

Recall the brouhaha that ensued exactly two years ago after the Caisse selected a bid by SNC-Lavalin and France’s Alstom to provide rolling stock, systems, operation and maintenance for the REM project, a contract worth more than $1 billion.

Last year, Premier Francois Legault said his government will force the Caisse to purchase trains made in Quebec as part of the extension of Montreal's Reseau Express Metropolitain light-rail system.

"It's certain. Whether in the form of the REM or tramways ... for sure we will require local content," he said at the Coalition Avenir Quebec's party convention on green issues in Montreal.

Well, Premier Legault will get his wish but in the new world order, Bombardier will become a shadow of its former self:
With just one business left, Bombardier Inc. has officially declared its selling spree over.

The Montreal-based company, which once made everything from snowmobiles to commercial aircraft, will focus solely on corporate jets following its announcement of two separate deals to sell off parts of its business in less than a week. And with the proceeds earmarked toward reducing a $10 billion debt load, Chief Executive Officer Alain Bellemare struck an upbeat tone on Monday after announcing the sale of Bombardier’s rail business to French train maker Alstom SA.

“It is a transformational deal for Bombardier,” Bellemare said during a call with analysts. “It marks the end of our turnaround and the beginning of a new and bright chapter for the company.”

Bellemare presided over many transactions, including the sale of its turboprop-plane business to Longview Aviation Capital Corp. last year, as well as agreements to offload its regional-jet operation and a wing plant in Northern Ireland. Last week, he completed Bombardier’s exit from commercial aerospace by ceding its stake in the Airbus SE A220 program.

On Monday, Bellemare touted Bombardier’s remaining business aviation portfolio, which includes its flagship Global 7500, the largest corporate jet. After a two-year delay and cost overruns, delivery started in December 2018 and the company is now ramping up production.

And that is not for sale, he indicated.

“We’ve completed the turnaround,” he said when asked about considering an offer for the division. “We wanted to ensure that we would have the right tools to de-leverage the business and this is what we’re announcing today. We really like our business aircraft business and we will continue to focus on this.”

The company’s aviation units employs more than 10,800 people in Quebec, anchoring an aerospace industry that’s more than 43,000-workers strong. The provincial government, which retains a 20% stake in the A220 program and had vowed to protect Bombardier and Airbus jobs in the province, also went for a hopeful note.

“I understand what Quebeckers feel when seeing an important chapter of Bombardier’s history closing, but one has to look to the future,” Economy Minister Pierre Fitzgibbon said in a release. With 18,000 employees across the world, “Bombardier will remain a significant industrial company and a leader in research and development on a Canadian scale.”
Bombardier's CEO, Alain Bellemare, and Economy Minister Pierre Fitzgibbonare are putting a brave face and good spin on this story but the truth is, Bombardier needed this deal or else it was headed south fast.

Investors are hammering Bombardier's B shares today on huge volume and if you look at the five-year chart, it's been a total disaster, down over 70% from the 2018 peak and approaching a low hit three years ago:

Let me be blunt, Bombardier isn't in good shape and it still faces business jet cycle challenges after this sale.

One person I know and trust told me: "Bombardier's senior managers are a bunch of arrogant cowboys who have destroyed this company and common shareholders while enriching themselves."

Strangely, at the beginning of the year, Bombardier said its top priority was buying back the Caisse’s stake in train unit (probably to sell it to Alstom).

What will the Caisse do? I guess it can buy more shares and it probably is buying shares today to prop up the price but I'm very uneasy about the Caisse, provincial and federal governments saving any company, especially if it's being badly managed.

Having said this, with the sale of Bombardier Transportion to Alstom, the Caisse is actually saving jobs and fulfilling its dual mandate of maximizing returns and developing Quebec's economy.

The key part of the press release above is this:
In the context of its agreement with CDPQ, Alstom also announced its intention to strengthen its presence in Québec through ambitious commitments that will be implemented in the first year following the transaction’s closing. These commitments include establishing the Americas’ headquarters in Greater Montréal, where a Head of the Americas will be based; a new design and engineering centre and centre for high-tech R&D; and the expansion of activities through increased opportunities for the La Pocatière and Sorel-Tracy manufacturing facilities.
Without these concessions, I doubt this deal would have gone through but CDPQ managed to get a firm commitment from Alstom and the Government of Quebec and Bombardier can breathe a sigh of relief.

Still, Alstom isn't a Quebec-based company, it's a French multinational and in the future, it will do what is in its best interests. And that means it won't seek approval from the Caisse or Quebec's government if it needs to move its operations elsewhere if the going gets tough.

At the very least, the Caisse's Bombardier Transportation saga comes to a close with this deal and that's a very good thing. What happens next with Bombardier remains to be seen but at least this Alstom deal is a good one for CDPQ and workers at Bombardier Transportation.

Lastly, I have openly questioned whether CDPQ's "dual mandate" is appropriate and necessary. Michael Sabia and his successor Charles Émond are obviously going to say there are no issues and the Caisse's Quebec portfolio has been successful, proving that the dual mandate isn't an issue. But when I see what has occurred at SNC and Bombardier, I wonder if depositors wouldn't be better off with a single, overarching mandate: maximize returns and forget trying to save every large Quebec company, especially badly managed ones.

Below, Bombardier Transportation is a global mobility solution provider leading the way with the rail industry’s broadest portfolio.

Next, I embedded highlights from Alstom's 2018 and 2019 year in review. You can see the synergies and why this is a great deal for Alstom, CDPQ and Bombardier Transportation's workers.

Fourth, Bombardier saw its stock price fall Tuesday, a day after announcing the sale of its train division. Meanwhile, Walmart is reporting big earnings, while COVID-19 is taking a bite out of Apple's earnings. Mike Eppel reports.

Lastly, the Montreal Gazette posted something on the dismantling of Bombardier Inc. Quite sad to see what the company’s workers have endured over the past decade but it hasn't been managed properly and my fear is that Bombardier's woes are far from over, even after this sale.

Update: A former pension fund manager I know has a different take on this deal and Bombardier:
You are just repeating what everybody says. The problem is simply that they took a chunk way too big for them with the C Series .Neither the Americans nor the French nor the Brazilians nor the Japanese nor the Chinese would have started a program like that without massive government help (military or otherwise). I think they did a very good job technologically (if not financially) and Airbus (and Quebec) will win a lot of money with it. Airbus and Boeing (without mentioning the Japanese and the Chinese) have shown how tough it is to develop a new plane and stay in the initial budget. We little Canadians have no clue what it takes in terms of technological and financial firepower.

The division that has been perennially mismanaged is the transportation side. I have heard these guys say that they will increase margins for the last 20 years but have never been able to deliver. The bottom line,I think, is that it is a bad business for all kinds of reasons and I am glad to see it go to a player probably better suited to deal with governments and eventually face the Chinese in world markets.

Bombardier is left with the best part now. The debt is gone. Buy it.
I won't buy it since I typically avoid Canadian stocks but he raises some good points and offers a different perspective.

Also, McGill professor Karl Moore wrote a very good and balanced op-ed which was published in the Montreal Gazette, Bombardier has fallen, but the future still looks promising. He notes:
First, let’s give credit where credit is due. Laurent Beaudoin is one of Canada’s, no, one of the world’s greatest entrepreneurs. He took Bombardier from a small company with only hundreds of employees to become Canada’s largest and most important global firm. He did it by a series of big bets over his more than 50 years at Bombardier, and the considerable majority paid off. Toward the end, though, he, the board and the senior executives took on too much debt in order to build the game-changing C Series, the Global executive jet and, for a while, the Lear 85. I suspect this is why Paul Tellier left Bombardier; he disagreed with Beaudoin’s entrepreneurial willingness to take on so much risk. Today, we realize that Tellier was right. Still, what a great entrepreneur Canada had in Beaudoin.
I will let you read the rest of his article here. I still think think Bombardier has a long tough slug ahead and its senior managers need to stop over-promising and under-delivering. Enough PR, time to get to work and execute on their strategic plan.