After considering an IPO and a private placement, Bombardier has decided that selling a 30 percent stake in its train unit to La Caisse de dépôt et placement du Québec (CDPQ) for $1.5 billion was the “most attractive option.”
The Canadian pension fund will be making a convertible share investment in BT Holdco, Bombardier Transportation’s newly created holding company.
The transaction, which has been approved by both companies’ boards of directors, will be executed through a private placement. It values Bombardier Transportation at $5 billion, the companies said in a statement.
Still subject to regulatory approvals, the deal is expected to close in the first quarter of 2016.
BT Holdco will own all of the assets of Bombardier’s current transportation business segment, with its operational headquarters remaining in Berlin.
Although CDPQ is acquiring a minority stake in the company, the terms of the agreement give the Canadian pension a significant say in governance and other issues, such as appointing three of the seven-member board of the new entity and weighing in on the company’s consolidated annual budget and strategic plan.
It will also have a voice in approving the chief executive’s contract and compensation, as well as the company's dividends, acquisitions and asset sales decisions. CDPQ will maintain these approval rights as long as it owns at least 10 percent of the company.
The terms of the transaction also provide CDPQ with significant guarantees, including a minimum return of 9.5 percent – which can fall to 7.5 percent if BT Holdco outperforms mutually agreed targets, or can reach 12 percent if the new entity underperforms.
CDPQ’s ownership is also tied to performance, with its 30 percent stake decreasing 2.5 percent annually to a minimum of 25 percent in the event of outperformance. Conversely, in the event BT Holdco underperforms, CDPQ’s equity stake can reach a maximum of 42.5 percent over a five-year period.
“Bombardier is a global leader in the rail industry, with a robust backlog, predictable revenues, and meaningful potential for growth,” said Michael Sabia, CDPQ’s president and chief executive. “The hybrid investment instrument designed for this transaction allows our depositors to benefit from the improving performance of Bombardier Transportation with its equity-like features, while protecting their capital through its bond-like characteristics. This investment is structured with the goal of delivering double-digit returns.”
The agreement is part of a series of initiatives that comprise Bombardier’s “transformation plan” as it looks to strengthen its finances after reporting a loss of $4.6 billion in earnings before interest and taxes (EBIT) in the third quarter this year.
Last month, Bombardier announced that the government of Québec would be investing $1 billion in the company’s C Series aircraft programme. Like the CDPQ transaction, all of the assets, liabilities and obligations of the C Series aircraft programme for which certification is imminent will be transferred to a newly created limited partnership. The government will own 49.5 percent of this new entity, with Bombardier holding the remaining majority stake.
“The 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,” said Alain Bellemare, Bombardier’s president and chief executive.
Bombardier Transportation has an installed base of over 100,000 vehicles worldwide and a $30 billion order backlog. Its products and services, offered in 60 countries worldwide, include trains, sub-systems, maintenance, system integration and signalling.
Its parent company, Bombardier Inc., is an aircraft manufacturer headquartered in Montreal.