Alstom, the French train giant fighting to stay on rails

Alstom’s acquisition of Canadian rival Bombardier’s train operations in 2021 was hailed as an “unique” moment that would make the French company a winner out of a new golden era dawning for the global rail industry.

The €5.5bn deal was a good strategic move, but it has since been overshadowed. One of the latest setbacks has led to a cash shortage at the second largest train manufacturer in the world.

Alstom was forced to cut its free cash flow projections this year due to problems with contracts at Bombardier and a wider struggle to manage its inventory and production of trains.

Henri Poupart Lafarge, the chief executive of the company, is now under increasing pressure after billions of Euros were wiped off its market capitalisation over recent weeks. The company has more than 80.000 employees and provides trains to markets from Australia to Saudi Arabia.

The crisis at Alstom also highlights the challenges train manufacturers face when managing orders, inventory and cash flow, especially at a moment when many governments are promoting more railway traffic as a way to combat global warming.

A competitor manufacturer said that if Alstom were to have a problem the entire country would be in a bind, as the company provides the majority of France’s trains and metros. It can be a major risk to industry. 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 Siemens’ planned merger with Germany Siemens.

The immediate risk, however, is that the group’s prized investment-grade rating will be stripped away. This would put further strain on its finances. Poupart-Lafarge faces a number of unenviable decisions as he takes on the role of CEO. He was previously the company’s financial chief and has been in that position since 2016.

Analysts believe the 54-year old may be forced to sell assets. JPMorgan analysts estimated that Alstom’s current value of €5bn would require a cash flow of €1bn over the next year to maintain its investment grade status.

Moody’s gives Alstom a Baa3, which is just one notch below junk status. Moody’s lowered the outlook of the French industrial group after Alstom cut its cash flow forecasts. It said that disposals were necessary to bring its gross debt ratio to core profit down to 3.7 in the next year, from 4.5.

Nathalie Tuszewski, an analyst at Moody’s, said that Alstom’s net debt of €2.13bn at the end March was not enough.

Alstom had warned about disruptions in cash flow shortly after the completion of the Bombardier acquisition.

According to analysts at Deutsche Bank, the October revelations “were a major blow to the management’s credibility”.

Alstom, which makes France’s TGV high-speed trains, has been using its short-term commercial papers facility more in recent months. This is increasing its costs.

Bankers and analysts say that a capital increase with a high degree of dilution is an alternative to selling assets.

One banker, who advises French equity listings, said that “the market still thinks that they need capital.” He added that the group might consider finding a large anchor investor to help protect it from the vagaries of the stock exchange.

Bernard Delpit, Alstom’s finance chief, sought to calm investors’ fears just over an hour after the warning was issued and only a few weeks into his new job. He said: “I’ll state it simply, a equity raise isn’t on the table.”

Alstom’s largest shareholder is the Caisse de depot et placement du Quebec, which acquired its stake in the Bombardier merger and now owns 17 percent. Bpifrance, the French investment bank owned by the French government, is second with 7.4 percent. Both refused to comment. Alstom is expected to provide more details on its financial situation when it announces first-half results, on November 15, after being the second worst performer in France’s blue chip CAC 40 since the beginning of October.

Bombardier was responsible for a third (€1bn) of the cash flow hit. The other half came from challenges with inventory management and the remaining from a decline in down payments.

Alstom, a company founded in the late 1920s in eastern France’s Alsace Region and with roots dating back to the region in the late 1920s, had identified €7bn-€8bn in lossmaking contracts from the €30bn in backlog that it acquired from Bombardier. Alstom, which competes against the likes Siemens, Hitachi, and China’s CRRC state-owned company, is still saddled with about a quarter.

The problems that were revealed last month stemmed from the UK contract Aventra, which was to build 443 trains. Some of these trains are currently running on London’s new Elizabeth Line and for operators like West Midlands Trains. However, the program has been plagued by delays.

According to sources familiar with the situation, the latest setback is that some Aventra customers are delaying taking delivery of and paying for dozens trains because they struggle to find drivers. The company announced that Aventra won’t be finished until next year.

Alstom is still trying to fix the Aventra mess, but it has also been struggling with inventory management and has completed fewer trains in the first half than expected as it tries to keep up to a record €87bn orders book.

It’s expensive to have trains that take up space. One analyst, who follows the industry, said that these are not mobiles. “You ended up with no money from late fees and delivery penalties.”

The industry has been plagued by what Delpit, the finance chief, called “lumpy cash flows” for years. Contract payments are often unpredictable and sometimes snarled by politics.

Alstom’s contract worth nearly £2bn to build trains for HS2 is in doubt now after Prime Minister Rishi sunak drastically scaled back the Project.

According to an executive from a rival manufacturer the lumpy cash flow issue has obscured that rail will be a major winner, as governments try to encourage people to get off their cars and onto trains in order to combat climate change. The executive stated that “it’s a sector right in the middle a push for decarbonisation and order books are never as full but shares haven’t followed.”

Alstom, despite the fall in its share price, has endured — and survived — worse traumas. It required a €2.2bn bailout from the government in 2004 when it was threatened with collapse by faults found on gas turbines that it manufactured.

The company was fined $772.3mn by US authorities in a foreign bribery investigation, a record amount. This was for the backhanders given via a middleman named “Mr Geneva”, “Mr Paris”, and “Old Friend”, to secure contracts in Egypt and Indonesia.

Analysts are confident that these problems will be temporary. Alstom announced last month that it is on track to meet other financial goals for the fiscal year ending March. These include sales growth above 5% and margins up to 6%. The company refused to make any further comments ahead of the results scheduled for next week.

Poupart-Lafarge has some damage that needs to be repaired. The share price is near its lowest level in 18 years. Last month, Poupart left Delpit, to reassure investors immediately after the warning.