Alstom/Bombardier Transport, a transformational transaction to create a new leader

On January 29th 2021, Alstom completed its acquisition of Bombardier Transportation (BT) – a division of Canadian manufacturer Bombardier Inc that specialises in rolling stock and rail transport – based on a reference price of €5.5 billion. Of its two shareholders, Bombardier Inc (67.5%) was paid in cash and shares, while CDPQ (32.5%) was paid in shares and agreed to reinvest in Alstom. The new entity has unparalleled commercial reach around the world thanks to the complementarity of the two companies. While Alstom already had a well-established customer base in France, Italy, Spain, India, Southeast Asia, North Africa and Brazil, Bombardier Transportation provides close proximity to customers in strategic markets such as the UK, Germany, the Nordic region, China and North America.

Why did Alstom submit this deal as an entry for the Prix du Club des Trente?

Carl Bassili: This was a transformational transaction for REPORT • CLUB DES 30 Alstom, creating a global leader based in France with unique geographic reach and an extensive range of solutions. The deal was complex in many respects. To begin with, the interests of the sellers were not fully aligned, with Bombardier Inc in a challenging financial situation and Caisse de Dépôt et Placement du Québec (CDPQ) willing to support the creation of a global champion in the rail industry. Antitrust was also a significant issue, which had to be appropriately handled based on the lessons learned from the failed tie-up between Siemens Transport division and Alstom. Lastly, the deal was mainly financed through the issuance of shares (worth around €5.1bn), with a €2bn rights issue for Alstom shareholders, along with two capital increases reserved for CDPQ and Bombardier. This structure was designed to enable Alstom to keep a strong balance sheet and offset the cost of the underperforming projects inherited from Bombardier Transportation. The deal was also an opportunity to reorganize Alstom’s shareholding structure through the change of majority shareholder, with Bouygues winding down its stake and CDPQ becoming Alstom’s new reference shareholder.

Why is it important for Alstom to have CDPQ as a shareholder?

Carl Bassili: CDPQ was already a major investor in France and is characterized by its long-term investment horizons; and they were particularly supportive of the planned tie-up. It is an attractive partner for Alstom given the significant demand for investment in new mobility solutions (rail and infrastructure). CDPQ has invested €2.6bn in total and has two representatives on the Alstom board of directors, along with one observer (censeur).

What were the main steps involved in the transaction?

Carl Bassili: Talks began in autumn 2019 and led to the signing of a memorandum of understanding (MoU) on February 17th 2020, just before the Covid lockdown hit in March 2020. Negotiations then resumed after the MoU was signed, due to financial and industrial challenges faced by Bombardier Transportation on contracts already under execution. This led in September 2020 to a reduction in the acquisition price as part of the discussions leading up to the signing of the share purchase agreement (SPA), following the approvals from the European Commission and Alstom’s Extraordinary Shareholders’ Meeting. The €2bn capital increase was finalised on December 7th 2020 and is the biggest capital raise for an acquisition in France since 2016. It allowed Alstom to secure equity financing prior to closing the deal on January 29th 2021, based on a reference price of €5.5bn. Management is now focused on developing the business and successfully integrating Bombardier Transportation.

Can you tell us a little about what led to the reduction in price?

Carl Bassili: In September 2020, the price was lowered by €300 million. That gave Bombardier Transportation an enterprise value of €5.5 billion when the acquisition was finalised, whereas the initial range had been set at between €5.8 billion and €6.2 billion. However, the price actually paid was €4.4bn, largely due to the adjustment mechanism negotiated to offset Bombardier Transportation’s negative net cash position on December 31st 2020, which was crucial to protect the balance sheet of the combined entity.

Is this a more attractive deal for Alstom than the aborted tie-up with Siemens?

Carl Bassili: The deal with Bombardier is very different from the planned tie-up with Siemens Transport, which would have given Siemens control over Alstom, with a different product mix that was more focused on signalling. That transaction also involved risks with regards to integration, since the two companies had different corporate cultures and needed to reach an agreement on how to implement the merger. In the case of the Bombardier acquisition, we have two companies with relatively similar cultures and clear governance, particularly since the deal involved Alstom taking control of Bombardier Transportation.

What were you most afraid of about this deal?

Carl Bassili: That it would not go through. Bombardier Transportation’s financial and operational problems and the challenging Covid-driven health situation were the backdrop to a transaction that was carried out without mishaps in a complex and volatile environment from start to finish.

The deal has created a global leader. How does it benefit Alstom?

Carl Bassili: This deal has created the world’s number two in terms of sales (€14bn in 2020) after Chinese manufacturer CRRC, which achieves most of its revenues in its home market. On a global level, not including China, Alstom is clearly number one. The size of the company – with nearly 72,000 employees in over 70 countries – is a key factor to successfully tackle the relevant challenges, particularly in new mobility, signalling, services, etc. Bombardier Transportation’s portfolio has a complementary geographic fit for Alstom, which is key in a context where local authorities’ procurement contracts focus more and more on local production. The combined entity will have significant investment capacity, especially in R&D, with a view to shaping a more sustainable world and achieving carbon neutrality in the rail industry.

How did financial markets react to the deal?

Carl Bassili: Markets reacted well to the deal as soon as they got wind of it, because it made strategic sense. The success of the capital increase proved investor interest in the transaction. On July 6th 2021, the company unveiled an ambitious new roadmap for the new combined entity, with sustained growth in sales of 5% a year between 2021 and 2025 and an expected margin of 8-10%, achieving €400m in cost synergies by 2025.

In what way is the deal important to Societe Generale?

Carl Bassili: This transaction is the fruit of a long collaboration between Alstom and Societe Generale, across both day-to-day and more transformational transactions. The success of this deal reflects the bank’s ability to leverage on its teams’ expertise in financial advisory, acquisition financing, capital markets and derivatives to successfully deal with the challenges associated with the execution of such a transaction.