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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Alstom’s M&A detour has lower chance of derailment

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Alstom is taking a second-class route around China. After Brussels blocked its preferred coupling with the rail unit of Germany’s Siemens, the French locomotive maker is paying 7.5 billion euros for the rival business of Canada’s Bombardier.


Given the dominance of China’s CRRC, staying single was not an option. And the chances of another red light from Europe’s antitrust controllers should be lower.


The planned acquisition will shunt the maker of the France’s high-speed trains into a clear second place globally, with combined annual sales of $17 billion.


It’s a complex deal: Alstom will partly fund the outlay by issuing fresh stock to joint-owner Caisse de Depot et Placement du Quebec, which will become the French group’s largest shareholder. But it’s a well-timed step.


Rail traffic is growing 3 per cent a year as urban populations swell, and countries try to cut their carbon emissions. The business will still be a distant second to state-controlled CRRC, which could notch up sales of nearly $38 billion this year.


The first question is whether Alstom can make a better job of running the outfit than Bombardier. That shouldn’t be hard. Bombardier’s trains had a history of arriving late or over budget, not helped by the distraction of its challenged aviation arm.


In 2019, sales fell 7 per cent and EBITDA a whopping 75 per cent. The upshot is Alstom getting a knock-down price, at just 10 times this year’s expected operating profit, compared to its own nearly 18 times valuation multiple.


Then there are the 400 million euros of synergies that Alstom says should kick in four years after the deal completes. Add that to the 600 million euros of EBIT that Bombardier’s unit is expected to generate this year, and the acquisition should deliver roughly 720 million euros of net operating profit after tax, equivalent to a near 10 per cent return on the 7.5 billion euro outlay, after including pension liabilities.


That’s only a whisker above Bombardier’s 9 per cent weighted average cost of capital, but Alstom can give itself some wiggle room if it manages to boost the rail unit’s operating margin in line with its own improvements to above 9 per cent.


Last but not least is the signal from Brussels. The two firms generate nearly two-thirds of their revenue in Europe but have less overlap in the high-speed rolling stock and signalling market than Alstom and Siemens.


That makes it less likely Brussels will slam on the competition brakes, an outcome that would only increase the chances of a runaway Chinese train. — Reuters


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