By Benjamin Kang Lim and Matthew Miller
BEIJING (Reuters) - Canada's Bombardier (TO:BBDb) has turned down a Chinese offer to buy up to 100 percent of its prized rail unit, documents seen by Reuters show, underscoring its reluctance to cede control of the unit to a state-owned Chinese buyer at this juncture.
Beijing Infrastructure Investment Co [BEINF.UL] (BII), a government-owned company that operates 18 metro lines in China's capital, has offered to acquire between 60 and 100 percent of Bombardier Transport, an Aug. 14 letter reviewed by Reuters outlining BII's offer showed.
Bombardier, which is looking to raise cash by listing a minority stake in its transport unit later this year, is attractive to Chinese players like BII, which, encouraged by the Chinese government, are seeking to acquire leading foreign technology to grow their businesses and global footprint.
Selling a majority stake would, however, expose Bombardier to political pressure in its home province of Quebec, where it generates high-paying jobs that could be lost through a takeover by a foreign buyer at a time when Canada's economy has slipped into recession.
In the letter addressed by BII Chairman Tian Zhenqing to Bombardier's Executive Chairman Pierre Beaudoin and not yet disclosed to the market, BII put the unit's enterprise value – calculated as equity plus debt - at $7-8 billion.
But Bombardier's Vice President for Mergers and Acquisitions Louis Veronneau, who was copied in the non-binding offer, rejected the proposal in a letter to Tian one week later.
"We are not exploring a transaction involving a majority stake at this juncture," Veronneau wrote back on Aug. 21.
Excluding debt, analysts and bankers have pegged the equity value of the transportation division at about $5 billion. Much of the company's value currently resides in its transportation business as its aerospace division has been hurt by delays and cost overruns tied to its C-Series line of commercial jets.
At Tuesday's close, Bombardier shares had fallen 70 percent this year, and the company's market capitalisation sits at about $2 billion, well below the equity value of the transportation unit, reflecting the struggles at its aerospace business and heavy debt load.
"BII and BT (Bombardier Transport) will have an incomparable synergetic relationship, and the combination will create a globalized world-class rail industrial group running the whole industrial chain," Tian wrote, adding he would keep management teams intact.
Tian said BII planned to fund the acquisition with cash reserves and possibly debt. The letter also said BII had gained "strong support" to complete the transaction from Chinese authorities.
Contacted by Reuters, BII declined to comment.
"We are exploring initiatives such as potential participation in industry consolidation, but we will not discuss our activities in this regard or speculate on potential outcomes," Bombardier spokeswoman Isabelle Rondeau said in an emailed statement.
Bombardier shares jumped 7.6 percent to C$1.28 on the Toronto Stock Exchange in early trading on Wednesday.
"Overall, we view the offer positively as it reflects the significant interest in BT's assets and supports our bullish stance on BT's value regardless of whether Bombardier decides to sell the division or to undertake a partial IPO," wrote Desjardins analyst Benoit Poirier in a note to clients.
RELUCTANCE
Bombardier, which needs cash to grapple with cost overruns at its aircraft business, has received expressions of interest for its rail unit from several players including financial investors, sources with direct knowledge of the situation told Reuters.
One of those came from China's state-owned rail giant CRRC Corp Ltd (SS:601766) (HK:1766), which also sought control, Reuters reported in April. CRRC said later that month it did not have plans to acquire rail assets from Bombardier.
Bombardier is open to the idea of a strategic partner but would rather avoid having to sell control of a key unit to a Chinese state-owned player, a source familiar with the company's thinking told Reuters.
Given the federal election being held in Canada this October, a majority sale would also be politically sensitive for Canadian regulators, who would have to approve the deal.
A deal with Chinese buyers would also be complicated by Chinese state regulations, including those on money leaving the country.
"M&A transactions are always complicated to begin with. And every time you do a deal with a Chinese investment group it comes with a lot of approvals from both sides of the Pacific," a source familiar with Bombardier's thinking told Reuters.
For the time being the company's baseline scenario remains that of listing a stake of between 20 and 30 percent in the unit in Frankfurt, a second person familiar with the situation said.
Selling a minority stake would allow Bombardier to make the argument that it is bringing in a new investor or partner while retaining control of the company.
"It makes a lot more sense, and it is a lot easier to sell politically," the first source said.