In 2021, Alstom hailed its acquisition of Canadian rival Bombardier’s train operations as a “unique moment” that would ensure the French company emerged a winner from a new golden age dawning on the global rail industry.
Less than three years later, the sound strategic logic of the €5.5bn deal has been overshadowed by a series of setbacks, the most recent of which has contributed to a cash crunch at the world’s second-largest train manufacturer.
Problematic contracts at Bombardier, together with a broader struggle to manage inventory and the production of its trains, forced Alstom early last month to slash its projections for free cash flow this year.
Now, with billions of euros wiped from the group’s market capitalisation in recent weeks, chief executive Henri Poupart-Lafarge is under mounting pressure to restore confidence in a company that has more than 80,000 employees and supplies trains in markets from Australia to Saudi Arabia.
As well as the perils sometimes hidden in acquisitions, the crisis at Alstom highlights the high-stakes challenge train manufacturers face in managing inventory, orders and cash flow at a time when many governments have championed busier railways as part of the answer to global warming.
“If Alstom had a problem, the whole of France would find itself pretty stuck,” given the company supplies most of the country’s trains and metros, said an executive at a rival manufacturer. “It can pose a major industrial risk.”
Alstom has said that the picture will improve as down payments on contracts trickle in, allowing the company to convincingly extol the benefits of a deal it struck not long after EU regulators quashed its planned merger with Germany’s Siemens.
But the immediate risk is that the group is stripped of its prized investment grade rating — a move that would strain its finances further. Poupart-Lafarge, a company veteran and one-time financial chief who has had the top job since 2016, faces some unenviable choices.
Analysts say the 54-year-old may have no option but to sell assets. Those at JPMorgan estimated that Alstom, now valued at about €5bn, needed a cash inflow of at least €1bn in the next 12 months to preserve its investment grade status.
Moody’s rates Alstom Baa3, just a notch above junk status. After Alstom axed its cash flow projections, Moody’s cut the French industrial group’s outlook to negative and said disposals looked necessary to ensure its ratio of gross debt to core profits heads towards 3.7 over the next 12 months, from above 4.5.
“We need to see that pace,” Moody’s analyst Nathalie Tuszewski said of Alstom, which had €2.13bn in net debt at the end of March.
The punishment meted out by the stock market since last month’s disclosure is in part a reflection that it was not the Bombardier deal’s first red flag: shortly after completing the acquisition Alstom warned on disruptions to cash flow.
But the October revelations were “a major blow to management’s credibility”, according to Deutsche Bank analysts.
While Alstom does not have large bond or long-term loans maturing in the next two years, the maker of France’s high-speed TGV trains has drawn more on its short-term commercial paper facility in recent months, adding to its costs.
The alternative to selling assets, say bankers and analysts, is a highly dilutive capital increase.
“The market still thinks they need capital,” said one banker who advises on French equities listings, adding that the group could consider finding a big anchor investor that would help shield it from the vicissitudes of the stock market.
Just over an hour after issuing the warning and barely weeks into the job, Alstom’s finance chief Bernard Delpit sought to dispel investors’ fears, declaring: “I will state simply, an equity raise is not on the table.”
Alstom’s biggest shareholders are the Caisse de dépôt et placement du Québec pensions fund that took its stake as part of the Bombardier deal and now holds 17 per cent. French state-backed investment bank Bpifrance is the second-largest, with 7.4 per cent. Both declined to comment.
Alstom, which has been the second-worst performer on France’s blue-chip CAC 40 index since the start of October, is expected to give more information on its finances when it reports first-half results on November 15.
About a third of the €1bn hit to cash flows came from Bombardier, half stemmed from wider challenges in managing inventory and the rest from a drop in the number of down payments on contracts.
Created in the late 1920s and with roots in the eastern France’s Alsace region, Alstom had previously identified €7bn to €8bn of lossmaking contracts out of the €30bn backlog it took on from Bombardier. The company, which competes with the likes of Siemens, Hitachi and China’s state-owned CRRC, remains saddled with roughly a quarter of those.
But the problems revealed last month were from a UK contract called Aventra to build 443 electric trains. Some are already running on London’s new Elizabeth Line as well as for operators such as West Midlands Trains, but the programme has been beset by delays.
In the latest setback, some of Aventra’s customers are putting off taking delivery and paying for dozens of trains in part because they are struggling to recruit drivers for them, according to people familiar with the matter. Aventra will now not be completed until next year, the company has said.
While Alstom tries to resolve the Aventra debacle, the company has been struggling to manage inventories and it completed fewer trains than it had expected in the first half as it races to keep up with a record €87bn order book.
“You end up with trains that take up room, it’s costly. These are not mobile phones,” said one analyst who covers the industry. “And you ended up without the cash from the delivery and late penalties.”
What finance chief Delpit described as “lumpy” cash flows have long blighted the industry. Payments on contracts are not always predictable and can sometimes get snarled up in politics.
In the UK, Alstom’s nearly £2bn contract to build trains for the HS2 rail line is now in doubt after Prime Minister Rishi Sunak radically scaled back the project.
The lumpy cash flow problem has, according to one executive at a rival manufacturer, obscured the fact that rail is likely to be a big winner as governments encourage more people out of cars and on to trains as part of an effort to tackle climate change.
“It’s an industry right in the middle of a push to decarbonise and order books have never been as full, but shares have not followed,” the executive said.
Despite the share price slump, Alstom has suffered — and survived — bigger traumas. In 2004, it required a €2.2bn government bailout when faults with gas turbines it then manufactured threatened to sink the group.
A decade later, the company paid US authorities $772.3mn, then a record fine by the Department of Justice in a foreign bribery case, for giving backhanders via a middleman codenamed “Mr Geneva” “Mr Paris” and “Old Friend” to win contracts in Egypt, Indonesia and other countries.
Some analysts remain confident that the problems will prove fleeting. Last month, Alstom confirmed it was on track to hit other financial targets for its fiscal year to end March, such as sales growth of above 5 per cent and margins of up to 6 per cent. The company declined to comment further ahead of its results next week.
But with the share price near an 18-year low, Poupart-Lafarge, who last month left Delpit to try to reassure the market in the immediate aftermath of the warning, has some damage to repair.
Additional reporting by Philip Georgiadis
