11/19/2015 07:15 EST | Updated 11/19/2016 05:12 EST

Bombardier, Caisse De Depot Et Placement Du Quebec Sign Deal

Christopher Furlong via Getty Images
DERBY, ENGLAND - JULY 16: Technicians work on London Underground trains at the Bombardier Transport manufacturing plant on July 16, 2014 in Derby, England. The train maker Bombardier build rolling stock for both mainline train operations and London Underground and currently they are building the latest consignment of carriages for the London Crossrail project. (Photo by Christopher Furlong/Getty Images)

MONTREAL — Weeks after receiving a cash infusion from the Quebec government, Bombardier has signed a deal that would see the province's pension fund manager invest US$1.5 billion for a minority stake in the company's rail business.

Under the agreement announced Thursday, the Caisse de depot et placement du Quebec would receive shares that would be convertible into a 30 per cent stake in a newly created holding company for Bombardier Transportation.

Bombardier (TSX:BBD.B) said the deal concludes its review of options for Bombardier Transportation, which sells subway cars and other mass transit systems. The company had considered spinning off the stake in a public offering and was rumoured to have been approached by Chinese railways.

"Today we are gaining an ideal partner for the sustainable growth of our business," Bombardier chief executive Alain Bellemare said during a conference call.

He said the transaction increases the company's financial and operational flexibility while allowing it to maintain a majority stake in the railway division. Its total liquidity or cash reserve would increase to about US$6.5 billion as of year-end.

The extra cash would allow Bombardier to put its two CSeries planes into service, develop the Global 7000/8000 business jets and provide a safety net if economic conditions put additional pressure on its business, Bellemare added.

Bombardier has been struggling to complete development of its CSeries passenger jet, which is over budget and behind schedule.

Last month, the Quebec government agreed to give Bombardier US$1 billion to help complete development of the CSeries in exchange for a 49.5 per cent stake in that project. The federal government is also considering a proposal to provide financial assistance.

The deal with the Caisse does not change that proposal, Bellemare said.

The investment announced Thursday includes terms that give the Caisse a minimum return of 9.5 per cent as well as provisions tied to the performance of Bombardier Transportation.

Caisse chief executive Michael Sabia said the institutional investor never considered participating in Quebec's investment in the CSeries because it views rail as a better way of taking advantage of changing global demand and urbanization in emerging markets.

"We think it's a business filled with potential," he said. "We're convinced that Bombardier Transportation is a good business. Our goal in working with Alain and his team is to make this good business into a really great business."

The Caisse has historically been a big backer of Quebec's largest companies, ensuring that Quebecor acquired the Videotron cable company and helping firms like SNC-Lavalin and Rona.

According to terms of the deal, the Caisse's stake can decrease to a minimum of 25 per cent if Bombardier Transportation does better than planned, and increase to a maximum of 42.5 per cent if it underperforms. The Caisse can also trigger a public offering or sale of the holding company's shares after five years.

The deal values the rail business at US$5 billion, which is below expectations, said analyst Benoit Poirier of Desjardins Capital Markets.

"We view positively the initiatives to improve the corporate governance of Bombardier, which we believe remains one of the Street's primary concerns," he wrote in a report.

The new holding company would be governed independently by a new board to be composed of seven members, three of which would be named by the Caisse.

Bellemare would be chairman and Bombardier Transportation president Lutz Bertling would continue in his current role. The deal is expected to close in the first quarter.

Analyst Walter Spracklin of RBC Capital Markets said the agreement bodes well for the CSeries project.

"We believe this is sufficient for Bombardier to reach production ramp-up of the CSeries over the next three years and is a positive for the stock," he wrote in a note to clients.

After initially soaring, Bombardier's shares fell more than three per cent at $1.24 in midday trading on the Toronto Stock Exchange.

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