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Sep 16, 2020

Bombardier bonds, shares rise as rail sale to Alstom is signed

Bombardier firms up deal to sell its rails division

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Bombardier Inc. said it will sell its rail unit to French train maker Alstom SA at a lower price than the two sides agreed upon in February, but will close the deal earlier than expected.

The new terms are based on an enterprise value of US$8.4 billion for the division, down US$350 million, Bombardier said in a statement. The Montreal-based company said it will receive net proceeds of about US$4 billion, as much as US$500 million less than it expected seven months ago.

Bombardier’s debt moved sharply higher. Bonds due in October 2022 traded at 91.3 cents on the dollar, up from 84.2 cents on Tuesday. The shares surged as much as 9.9 per cent, their biggest climb since July 22. Alstom shares rose 1.1 per cent.

“I think a lot of people were expecting a price reduction of a larger magnitude,” Dan Fong, an analyst with Veritas Investment Research Corp., said. Alstom had previously hinted it might seek better terms after the Canadian firm reported a second-quarter loss on write downs at the unit.

The fact that the deal is now expected to close in the first quarter of 2021, rather than the first half, is also encouraging, Fong said. “It’s looking like they’re going to get a sizable chunk of proceeds sooner, shore up the balance sheet, and re-align the business on the business jet division. So all in all, I think it looks pretty positive.”

Caisse de depot et placement du Quebec, a minority investor in the rail business, is also selling its stake to Alstom. The Caisse will receive US$2.2 billion, Bombardier said.

Getting a definitive agreement is a positive step for Bombardier, according to National Bank of Canada analyst Cameron Doerksen. “Today’s news creates more certainty around cash proceeds for Bombardier as well as the closing time frame,” he said in a report.

There are still hurdles to overcome. While the deal received preliminary approval from the European Union in July, there are a few more countries that need to provide their consent and Alstom shareholders must support it in a vote on Oct. 29, he added.

Terms of the deal were “adapted to the current situation,” Alstom said in a separate statement. Bombardier said the new price reflects the unit’s “current operational performance and market conditions.”

Bombardier is counting on the sale to reduce its debt load, which stood at US$10.3 billion at the end of the second quarter. Concern over a potential default has sent its shares plummeting 77 per cent this year.

--With assistance from Divya Balji.