Alstom/Bombardier: keeping track
Alstom will have its work cut out to get the Canadian group’s margins back on track, but greater scale would help it compete with industry leader CRRC
The only way to catch a train is to miss the one before, wrote GK Chesterton. Alstom also appears to believe in second chances. Its hopes of scaling up were dashed last year when a mooted rail merger with Siemens was nixed on competition grounds. Now it is in talks with Canada’s Bombardier over a possible acquisition of its train business.
The mooted price — about $7bn including debt — is a sign of Bombardier’s weakness. It would value its rail business at 13 times its trailing operating profit. That compares with just over 18 times for Alstom, a business of comparable scale and — until recently — lower profit margins. Projects in the UK, Switzerland and Germany have knocked Bombardier’s Berlin-based business off the rails.
Alstom will have its work cut out to get Bombardier’s margins back on track. But there is a bigger prize. Greater scale would help it compete with China’s CRRC, the industry leader. Its global ambitions were evident in its offer to build Britain’s high-speed railway, HS2, at breakneck speed.
Over-extended Bombardier needs cash to cut its $7bn net debt pile, more than six times this year’s expected ebitda. Alstom has about $1bn of net cash. But the latter business, which nearly went bust in 2003, would struggle to gear up and retain its credit rating. The purchase probably requires the issuance of more shares.
Investors seem unfazed. Alstom shares are up 11 per cent over the past month, as deal speculation mounted. The deal could result in savings of about €244m, worth about €1.8bn taxed and capitalised. That assumes savings of about 1.5 per cent combined revenues, normal for the capital goods sector but only half as large as the target in the proposed Siemens Alstom transaction, says UBS.
That is a good sign. Less overlap between the businesses reduces the chance of regulators blocking the deal, as with Siemens Alstom. Scale matters in this industry. Consolidation may be necessary to respond to growing economic nationalism.