MONTREAL – Weeks after receiving a cash infusion from the Quebec government, Bombardier has signed a deal that would 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 announced Thursday, the Caisse de depot et placement du Quebec would receive shares that would be convertible into a 30 per cent stake in a newly created holding company for Bombardier Transportation.
Bombardier (TSX:BBD.B) said the deal concludes its review of options for the division, 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.
“Today we are gaining an ideal partner for the sustainable growth of our business,” Bombardier chief executive Alain Bellemare said during a conference call.
He said the transaction increases the company’s financial and operational flexibility while allowing it to maintain a majority stake in the railway division. Its total liquidity or cash reserve would increase to about US$6.5 billion as of year-end.
The cash would allow Bombardier to put its two CSeries planes into service, develop the Global 7000/8000 business jets and provide a safety net if economic conditions put additional pressure on the business, Bellemare added.
Bombardier has been struggling to complete development of its 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 financial assistance.
The deal with the Caisse does not change that proposal, Bellemare said.
Caisse chief executive Michael Sabia said the institutional investor never considered participating in Quebec’s investment in the CSeries because it views rail as a better way of taking advantage of changing global demand and urbanization in emerging markets.
“We think it’s a business filled with potential,” he said. “We’re convinced that Bombardier Transportation is a good business. Our goal in working with Alain and his team is to make this good business into a really great business.”
The Caisse has historically been a big backer of Quebec’s largest companies, ensuring that Quebecor acquired the Videotron cable company and helping firms like SNC-Lavalin and Rona.
According to terms of the deal, the Caisse’s stake can decrease to a minimum of 25 per cent if Bombardier Transportation does better than its business plan, and increase to a maximum of 42.5 per cent if it underperforms. The Caisse can trigger a public offering or sale of the holding company’s shares after five years while Bombardier can purchase the Caisse’s interest after three years — both netting the Caisse a premium return.
It also has veto on the nomination of new independent directors of Bombardier Inc.
The deal values the rail business at US$5 billion, which is at the low end of 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 would be governed independently by a new board to be composed of seven members, three of which would be named by the Caisse.
Bellemare would be chairman and Bombardier Transportation president Lutz Bertling would continue in his current role. The deal is expected to close in the first quarter.
After initially soaring, Bombardier shares closed unchanged at $1.28 on the Toronto Stock Exchange, although volume of 27.7 million shares was the most on Canada’s main index.
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