Exclusive: Cash-hungry Alstom points to IPO for rail arm as early as June
PARIS (Reuters) - Cash-hungry engineering firm Alstom may use a stock market listing to sell a stake in its transport business as early as June if a trade buyer cannot be found sooner for the maker of France's iconic high-speed trains, its transport chief said.
Alstom (ALSO.PA) announced in November it was seeking a buyer for the transport business, auctioning the family silver after a collapse in orders for its larger power business punched a hole in its balance sheet, battered its market value, and brought its debt within a notch of "junk" ratings.
Three months later, the need is as strong as ever and no obvious buyer has emerged, so the company's favored route is now an initial public offering for the transport unit, which is the world's number two maker of railway equipment behind Canada's Bombardier (BBDb.TO).
The transport unit's boss, Henri Poupart-Lafarge, said an IPO would allow the parent firm to raise cash without closing the door to an alliance with a strategic investor later on.
"A stock listing is interesting because it can pave the way to partnerships and consolidation in a rather competitive market," he told Reuters. He predicted a listing could come as early as June.
The group slashed its profit and cash-flow targets in January, and its shares have hit eight year lows this week. The company hopes to raise up to 2 billion euros ($2.7 billion) this year via the stake sale and divestment of some other assets.
Valuations for the transport business vary between 2.8 and 3.9 billion euros, suggesting Alstom could raise between 700 million and 1.9 billion for a stake of a quarter to a half.
Alstom Transport is the smaller of its two main businesses, but has seen steady growth while the bigger power generation business has stalled.
The parent firm needs cash to service 5 billion euros in debt, including 750 million in bonds which mature in September. Moody's, which downgraded Alstom's long-term debt in June to one notch above junk, gave its rating a negative outlook last month, citing a risk asset sales would fail to raise enough cash.
The transport division accounts for just over a quarter of Alstom's revenue with sales of 5.5 billion euros in the last fiscal year.
The unit secured record orders in the past year, including a contract to equip Riyadh's subway and an order for 600 trains in South Africa. Its order backlog at around 23 billion euros last fiscal year represents more than four years of sales. But such big orders often come with generous terms for the customer, making it difficult for potential investors to value.
"The buyer can never be 100 percent sure what margins are in your backlog, so it's very difficult to crystallize the value," said Rob Virdee, analyst at Espirito Santo.
Poupart-Lafarge said the unit could do better than the 3 percent annual growth expected industry-wide over the next five years and aims to deepen existing industrial partnerships to tap the emerging markets of Russia and China.
For now though, there is no obvious buyer. Investors fear the company is likely to be seen as a forced seller with little negotiating power. For the parent firm, the sale could further skew revenues towards the more cyclical power business and fail to improve cash generation over the long run.
"It's the one area where they are getting reasonable orders, so is it the right time to be selling it?" said Andrea Williams, European fund manager at Royal London Asset Management, whose fund sold its small holding in Alstom late last year. "It strikes me as something they came up with almost in desperation to try and restore the balance sheet," she said.
James Stettler of Barclays Capital, called transport the "jewel in the crown" at Alstom. "It's not a great strategic move, but at this stage the company has limited options."
The transport business has seen its operating margins pinched. Deals in emerging markets such as the latest one in South Africa often come with margin-hurting sweeteners like commitments to build plants on-site.
Operating margins for the transport business last year stood at 5.4 percent, far below that of the group, at 7.2 percent.
Poupart-Lafarge declined to detail the current margins for the transport arm or what they would be in five years. He said the business would be affected by the group's restructuring, unveiled in November with 1,300 job cuts, but did not elaborate.
The transport business remains in talks with industrial partners, notably Russia's Transmashholding, of which it holds a 25 percent stake, to see if they are willing to invest, he said.
"Even if, for timing purposes or for other reasons, we opt for a stock market listing, that wouldn't be a failure. The talks can continue," he said, noting that one or several industrial partners could snap up shares in the business then.
He sees growth opportunities in Russia, with a strong freight market, as well as China and Japan.
"Most of our partnerships will be geographic ... In those countries there are major players, well established on their market with whom we could exchange technology and find some kind of win-win situation," he said.
A sale via a listing would also enable Alstom to raise cash for acquisitions, particularly in signaling where it will look out for opportunities, he said. The segment is consolidating, he noted, with Siemens buying the rail signal business of British engineer Invensys last year.
This is not be the first time Alstom has sold assets to plug a funding gap. Ten years ago, saddled with faulty gas turbines and the collapse of a major customer, the group was on the verge of bankruptcy. The French state came to the rescue and bought a stake which it later handed over to Bouygues, (BOUY.PA), but it also stripped some assets to raise cash and satisfy regulators.
The company then shed its industrial turbines arm, which became part of German rival Siemens (SIEGn.DE), and its power distribution equipment business, sold to Areva (AREVA.PA). The resulting narrower product offering has made it tougher for Alstom to compete with Siemens, ABB and General Electric (GE.N) at a time when utilities are delaying power equipment spending.
That market for gas, coal and nuclear plant power kit accounts for close to 45 percent of Alstom's group revenue, but orders fell 12 percent so far this year, prompting last month's reining in of targets.
($1 = 0.7402 euros)
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