An employee works on the electronics of a passenger door inside a London Underground subway carriage at Bombardier Inc.'s Litchurch Lane railcar factory in Derby, U.K., on Tuesday, Feb. 25, 2014. Thursday’s news that Quebec’s giant pension-fund manager will invest $1.5-billion (U.S.) in Bombardier’s rail unit raises questions about whether the company still needs the help of the Canadian government.Chris Ratcliffe/Bloomberg
The Caisse de dépôt et placement du Québec's injection of $1.5-billion (U.S.) for a 30-per-cent stake in Bombardier Inc.'s passenger train business represents a potentially fresh start at the rail giant, but work remains to get it back on track, say observers.
Montreal-based Bombardier and the giant public pension fund say the "partnership" they have struck includes the creation of a new board to "independently" govern the chronically underachieving Berlin-based rail division, whose assets are being rolled into a holding company called Bombardier Transportation (Investment) UK Ltd.
Three of the seven directors on the new board will be named by the Caisse, and its investment is closely tied to a set of performance incentives for BT, which has for years failed to deliver on its profit-margin targets.
The new structure looks promising, despite the Caisse's investment also being "driven by political issues," because of Bombardier's status as a global national champion, said Maria Leenen, the head of rail consultancy SCI Verkehr GmbH.
"I think that Bombardier has good opportunities to solve their problems – if they face [them]. It will take time to fulfill the performance goals – but it is possible," Ms. Leenen said in an e-mail.
The Caisse-Bombardier deal values BT at $5-billion, lower than the valuations of many analysts who have been anticipating a transaction involving the rail unit ever since Bombardier said in May it wanted to spin off part of BT in a public offering.
The deal is generally a positive one for Bombardier, Desjardins Securities analyst Benoit Poirier said in a research note. However, "on the negative side, we believe the $5-billion value for BT sits at the low end of the $5- to $6-billion range at which we believe the Street was valuing the division" and below the $7- to $8-billion Beijing Infrastructure Investment is reported to have offered Bombardier for a 60- to 100-per-cent stake, he said.
After years of failing to make its target of 8-per-cent margins at BT, Bombardier no longer sets a target. In the first half of this year, the margin – a measure of earnings before interest and tax (EBIT) – was 5.6 per cent.
The arrival of a major outside investor will likely result in heightened pressure on BT to boost margins and resolve execution problems it has had, including repeated failures to deliver streetcars on time to the Toronto Transit Commission. There is also pressure in the form of continuing consolidation in the rail business around the world, and both Bombardier and the Caisse are not ruling out potential future deals involving BT.
China's two state-owned rail companies, CSR Corp. and China CNR Corp., merged earlier this year to create an Asian industry giant and China has been very aggressive over the past few years, moving beyond its home turf into European and North American markets.
Asked on an analysts' conference call Thursday if the Caisse investment acts as a roadblock to future potential deals, Bombardier chief executive officer Alain Bellemare replied: "We have maintained the flexibility to continue looking at potential strategic options. We understand that there is consolidation in the rail industry" and the transaction "preserves the ability for us to do what is right in terms of industry consolidation moving forward."
"If Alain had an interest in it," Caisse CEO Michael Sabia said, "and an interesting transaction came along, we would regard that as actually a value-creating opportunity and we would be in general – and strategically – quite supportive of Bombardier going in that direction."
SCI Verkehr's Ms. Leenan said she wouldn't be surprised to at least see some strategic alliances between BT and partners in the future.