{"id":46795,"date":"2023-11-12T07:09:27","date_gmt":"2023-11-12T07:09:27","guid":{"rendered":"https:\/\/innodebt.com\/business\/alstom-the-french-train-giant-battling-to-stay-on-the-rails\/"},"modified":"2023-11-12T07:09:27","modified_gmt":"2023-11-12T07:09:27","slug":"alstom-the-french-train-giant-battling-to-stay-on-the-rails","status":"publish","type":"post","link":"https:\/\/innodebt.com\/?p=46795","title":{"rendered":"Alstom: the French train giant battling to stay on the rails"},"content":{"rendered":"
\n

In 2021, Alstom hailed its acquisition of Canadian rival Bombardier\u2019s train operations as a \u201cunique moment\u201d that would ensure the French company emerged a winner from a new golden age dawning on the global rail industry.<\/p>\n

Less than three years later, the sound strategic logic of the \u20ac5.5bn deal has been overshadowed by a series of setbacks, the most recent of which has contributed to a cash crunch at the world\u2019s second-largest train manufacturer. <\/p>\n

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. <\/p>\n

Now, with billions of euros wiped from the group\u2019s 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. <\/p>\n

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.<\/p>\n

\u201cIf Alstom had a problem, the whole of France would find itself pretty stuck,\u201d given the company supplies most of the country\u2019s trains and metros, said an executive at a rival manufacturer. \u201cIt can pose a major industrial risk.\u201d<\/p>\n

<\/source><\/source>\"Henri<\/picture>
Henri Poupart-Lafarge is under growing pressure to restore confidence in Alstom<\/span> \u00a9 Morissard Aurelien\/ABACA via Reuters<\/span><\/figcaption><\/figure>\n

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\u2019s Siemens.<\/p>\n

But the immediate risk is that the group is stripped of its prized investment grade rating \u2014 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. <\/p>\n

Analysts say the 54-year-old may have no option but to sell assets. Those at JPMorgan estimated that Alstom, now valued at about \u20ac5bn, needed a cash inflow of at least \u20ac1bn in the next 12 months to preserve its investment grade status. <\/p>\n

Moody\u2019s rates Alstom Baa3, just a notch above junk status. After Alstom axed its cash flow projections, Moody\u2019s cut the French industrial group\u2019s 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.\u00a0<\/p>\n

\u201cWe need to see that pace,\u201d Moody\u2019s analyst Nathalie Tuszewski said of Alstom, which had \u20ac2.13bn in net debt at the end of March.<\/p>\n

The punishment meted out by the stock market since last month\u2019s disclosure is in part a reflection that it was not the Bombardier deal\u2019s first red flag: shortly after completing the acquisition Alstom warned on disruptions to cash flow.<\/p>\n

But the October revelations were \u201ca major blow to management\u2019s credibility\u201d, according to Deutsche Bank analysts.<\/p>\n

While Alstom does not have large bond or long-term loans maturing in the next two years, the maker of France\u2019s high-speed TGV trains has drawn more on its short-term commercial paper facility in recent months, adding to its costs. <\/p>\n

The alternative to selling assets, say bankers and analysts, is a highly dilutive capital increase. <\/p>\n

\u201cThe market still thinks they need capital,\u201d 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. <\/p>\n

Just over an hour after issuing the warning and barely weeks into the job, Alstom\u2019s finance chief Bernard Delpit sought to dispel investors\u2019 fears, declaring: \u201cI will state simply, an equity raise is not on the table.\u201d<\/p>\n

Alstom\u2019s biggest shareholders are the Caisse de d\u00e9p\u00f4t et placement du Qu\u00e9bec 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.<\/p>\n

<\/source><\/source>\"The<\/picture>
The Bombardier factory in Hennigsdorf, Germany: Alstom\u2019s purchase of Bombardier\u2019s train business has proved troublesome.<\/span> \u00a9 Krisztian Bocsi\/Bloomberg<\/span><\/figcaption><\/figure>\n

Alstom, which has been the second-worst performer on France\u2019s 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.<\/p>\n

About a third of the \u20ac1bn 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.<\/p>\n

Created in the late 1920s and with roots in the eastern France\u2019s Alsace region, Alstom had previously identified \u20ac7bn to \u20ac8bn of lossmaking contracts out of the \u20ac30bn backlog it took on from Bombardier. The company, which competes with the likes of Siemens, Hitachi and China\u2019s state-owned CRRC, remains saddled with roughly a quarter of those.<\/p>\n

But the problems revealed last month were from a UK contract called Aventra to build 443 electric trains. Some are already running on London\u2019s new Elizabeth Line as well as for operators such as West Midlands Trains, but the programme has been beset by delays. <\/p>\n

In the latest setback, some of Aventra\u2019s 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. <\/p>\n

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 \u20ac87bn order book. <\/p>\n

\u201cYou end up with trains that take up room, it\u2019s costly. These are not mobile phones,\u201d said one analyst who covers the industry. \u201cAnd you ended up without the cash from the delivery and late penalties.\u201d<\/p>\n

What finance chief Delpit described as \u201clumpy\u201d cash flows have long blighted the industry. Payments on contracts are not always predictable and can sometimes get snarled up in politics. <\/p>\n

In the UK, Alstom\u2019s nearly \u00a32bn contract to build trains for the HS2 rail line is now in doubt after Prime Minister Rishi Sunak radically scaled back the project.<\/p>\n

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.<\/p>\n

<\/source><\/source>\"The<\/picture>
The assembly line at the Alstom factory in Aytre, France: a crisis could pose industrial risk <\/span> \u00a9 Marlene Awaad\/Bloomberg<\/span><\/figcaption><\/figure>\n

\u201cIt\u2019s an industry right in the middle of a push to decarbonise and order books have never been as full, but shares have not followed,\u201d the executive said.<\/p>\n

Despite the share price slump, Alstom has suffered \u2014 and survived \u2014 bigger traumas. In 2004, it required a \u20ac2.2bn government bailout when faults with gas turbines it then manufactured threatened to sink the group. <\/p>\n

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 \u201cMr Geneva\u201d \u201cMr Paris\u201d and \u201cOld Friend\u201d to win contracts in Egypt, Indonesia and other countries. <\/p>\n

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.<\/p>\n

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. <\/p>\n

Additional reporting by Philip Georgiadis<\/em><\/p>\n

\u00a0 <\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

In 2021, Alstom hailed its acquisition of Canadian rival Bombardier\u2019s train operations as a \u201cunique moment\u201d that would ensure the French company emerged a winner from a new golden age dawning on the global rail industry. 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