Bombardierannounced it has entered into a definitive agreement with CDPQ for a $1.5 billion convertible share investment in Bombardier Transportation's newly-created holding company, Bombardier Transportation (Investment) UK Ltd ("BT Holdco"). Under the terms of the agreement, CDPQ will acquire shares of BT Holdco convertible into a 30% common equity stake of BT Holdco, subject to annual adjustments related to performance. The transaction will be executed through a private placement and values Bombardier Transportation at $5 billion. The investment has been approved by the Boards of Directors of Bombardier and CDPQ.
BT Holdco will own all of the assets of Bombardier's current Transportation business segment, with its operational headquarters remaining in Germany. It will be governed independently by a new Board to be composed of seven members, three of which will be named by CDPQ. Alain Bellemare will chair the Board. Dr. Lutz Bertling, President, Bombardier Transportation, will continue in his current role.
The transaction concludes the review of financing options previously announced for Bombardier Transportation. As previously announced, Bombardier's Board of Directors examined a wide range of strategic options for its rail business. After a thorough review process, including an initial public offering and a competitive international auction process for the private placement of a minority stake, the Board of Directors of Bombardier determined the transaction announced today, contemplating the sale of 30% of Bombardier Transportation to CDPQ, is the most attractive option. The transaction announced today, when completed, will crystallize the value of Bombardier Transportation and strengthen Bombardier's financial position, with no increase in debt. The funds to be received by BT Holdco from the transaction will be distributed to Bombardier and Bombardier intends to use the proceeds for general corporate purposes.
"This investment by CDPQ, which has a long history as one of our major investors, is a testimonial to the growth potential of the rail industry and to Bombardier's leadership in seizing the opportunities this market offers on a global scale," said Alain Bellemare, president and chief executive officer of Bombardier. "Bombardier and CDPQ have one common objective: leveraging Bombardier Transportation's innovative portfolio of products and services, engineering talent and worldwide presence to drive margin expansion," he added.
"Bombardier Transportation is a global leader in the rail industry, with a robust backlog, predictable revenues, and meaningful potential for growth. The strong performance incentives that are at the heart of this transaction and management's plan to improve execution have a single focus: creating more value at Bombardier Transportation," said Michael Sabia, president and chief executive officer of CDPQ. "The hybrid investment instrument designed for this transaction allows our depositors to benefit from the improving performance of Bombardier Transportation with its equity-like features, while protecting their capital through its bond-like characteristics. This investment is structured with the goal of delivering double-digit returns," added Mr. Sabia.
Under the terms of the transaction, CDPQ is entitled to:
• the higher of
° the fair market value of its 30% stake in BT Holdco (on an as-converted basis)
° or a minimum return of 9.5%
° both subject to the annual performance adjustments described below
• in certain circumstances, based on the call option, the tag-along, drag-along and change of control rights, the higher of
° if applicable, the third-party offer for its stake (on an as-converted basis)
° or a minimum three-year 15% compounded annual return
• at any time after three years after closing, if Bombardier buys back CDPQ's convertible shares, the higher of
° the fair market value of its stake (on an as-converted basis)
° or a minimum 15% compounded annual return
• voting rights (on an as-converted basis), being equal to 30% initially
Performance incentives
The terms of the transaction provide strong performance incentives for Bombardier Transportation. For each of the first five years following the closing date, CDPQ's ownership (on conversion) and return may be subject to upward or downward annual adjustments, based on a performance target jointly agreed to as part of Bombardier Transportation's business plan.
If Bombardier Transportation outperforms its business plan, CDPQ's percentage of ownership on conversion of its shares decreases by 2.5% annually, down to a minimum threshold of 25%. In this circumstance, the convertible shares' minimum return also decreases from 9.5% to a floor of 7.5%.
Conversely, should Bombardier Transportation underperform relative to its plan, CDPQ's percentage of ownership on conversion of its shares will increase by 2.5% annually, up to a maximum of 42.5% over a five-year period. In this case, the convertible shares' minimum return also increases by 2.5% up to 12%.
Financial stability
Recognizing the importance of Bombardier's financial stability to the entire corporate group, the parties have agreed to a cash reserve threshold of at least $1.25 billion, based on a jointly agreed upon formula. In the event Bombardier's cash reserves fall below that level, the Board of Bombardier will create a Special Initiatives Committee composed of three independent directors acceptable to CDPQ, and responsible to develop an action plan to restore cash reserves above the threshold. The implementation of the plan, once agreed with CDPQ, will be overseen by the Special Initiatives Committee.
In addition, with respect to the nomination of any new independent directors of Bombardier, Bombardier will work collaboratively with CDPQ and seek to obtain CDPQ's agreement on the final candidate(s) recommended to the Board.
As part of the transaction, the Majority Holder (as defined in Bombardier's articles of amalgamation) of Bombardier has committed to fully support any action plan recommended by the Special Initiatives Committee and agreed to by CDPQ, as well as the new selection process for new independent directors of the Bombardier Board.
View the additional details at http://www.bombardier.com/en/media/newsList/details.binc-20151119-bombardier-and-cdpq-enter-into-definitive-agreemen.bombardiercom.html
