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Runaway train

10 August 2020 By Christopher Thompson

Europe’s biggest transport deal could be on track for a Covid-19 discount. French train maker Alstom on Monday hinted it’s reassessing its $8.2 billion buyout of Bombardier’s train unit. The Canadian group’s high debts and European Union consent for the union only strengthen Alstom Chief Executive Henri Poupart-Lafarge’s negotiating hand.

On Monday Poupart-Lafarge issued a cryptic statement referencing “unexpected and negative developments” at its prospective target compared to when a deal was announced back in February. Bombardier’s recent interim results offer a clue: the company’s transport unit slumped to a $377 million operating loss in the second quarter after $435 million in unexpected one-off costs at existing projects in the United Kingdom and Germany.

The setback makes Alstom’s purchase, which was already pricey, look downright overpriced. Analysts at Raymond James now reckon the Bombardier division will make an operating profit of just $369 million next year.

Obtaining a discount is one way to remedy that. Assume Poupart-Lafarge were to cut the enterprise value of Bombardier’s business by a fifth to $6.6 billion, and that projected cost savings remain unchanged at 400 million euros ($470 million). Assuming a 25% tax rate, Alstom would make a return on its investment of more than 9%, slightly exceeding its cost of capital.

Bombardier has little scope to resist. First, the deal is non-binding, which means Alstom would have to pay a modest 75 million euro break fee if it chooses to walk away. Second, the Toronto-listed company badly needs the money. Net debt stands at C$7.7 billion ($5.8 billion), Raymond James reckons, nearly 9 times trailing EBITDA. Finally, while Bombardier could court other potential suitors such as Germany’s Siemens, tricky EU regulators have already cleared the Franco-Canadian union.

Given that the cost savings would help to cushion any financial fallout from Covid-19, the purchase still makes strategic sense for Alstom. That shouldn’t prevent Poupart-Lafarge from driving a hard bargain.

 

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