(News Bulletin 247) – The railway equipment manufacturer announced on Friday that it had reached an agreement with the German group Knorr-Bremse to sell its conventional signaling activities in North America for around 630 million euros. An encouraging operation for the market as the group must find 2 billion euros to get out of debt.

Alstom’s stock market rally is gaining credibility. The equipment manufacturer announced a major sale on Friday evening, thus sending a guarantee to the market of its debt reduction. The railway equipment manufacturer has entered into an agreement with the German Knorr-Bremse AG to sell part of its railway signaling activity in North America, i.e. “conventional” signaling.

“Conventional” signage is a type of signage referring to traditional and non-digital technologies. It relies on predetermined block systems where the tracks are divided into segments, each controlled by optical signals at the edge of the track. This method therefore relies on a physical infrastructure to detect trains.

In contrast, digital signaling uses technologies such as continuous radio communication between tracks and trackside data centers with automated control. Alstom will keep this type of signaling in its portfolio in North America.

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A product of 620 million euros

The group indicates that the sale amounts to an amount of 630 million euros for proceeds net of taxes and transaction costs of 620 million euros. The scope that would be sold would also represent revenues of 300 million euros, or 1.8% of turnover for the 2022-2023 financial year.

The transaction is expected to close in summer 2024, subject to customary conditions.

On the Paris Stock Exchange, this announcement allows Alstom shares to gain 2% around 10:40 a.m. after showing an increase of more than 5% at the start of the morning. Above all, since mid-February, Alstom has gained more than 35% on the stock market.

The valuation of the railway equipment manufacturer was, of course, evolving, with investors having been burned by the heavy warning on the company’s cash flow last fall. Alstom had burned more than 1 billion euros over the first six months of its 2023-2024 financial year.

Faced with market doubts and the threat of a downgrade of its rating by Moody’s, Alstom decided to take measures to strengthen its financial balance sheet and reduce debt.

The group intends, in addition to organic debt reduction – achieved through its cash generation – to reduce its debt by two billion euros through “inorganic measures”. These measures will take the form of asset transfers for a target of 500 million to more than 1 billion euros, quasi-equity measures (such as opening the capital of a subsidiary via investor subscription to perpetual bonds, or the issuance of hybrid bonds) and a capital increase.

Important meeting on May 8

Alstom must reveal a precise breakdown of the resources it intends to release via each of these three levers on May 8, when it publishes its annual results.

But the idea to understand is the following: the more Alstom manages to sell assets, the less the group will need to carry out a capital increase, and therefore the less the current shareholders will be diluted.

Deutsche Bank judged in mid-March that the market call could be limited to 500 million euros, which reassured investors. Friday evening’s announcement lends credibility to this hypothesis of a limited capital increase.

“The operation marks an important step in the implementation of the group’s 2 billion euro debt reduction program, which should be detailed on May 8,” Deutsche Bank wrote on Monday. “The dilution linked to a possible capital increase is largely integrated, because the stock is already one of the best-selling in Europe and trades at a discount of around 40% compared to its peers,” she continues.

We can, however, emphasize that the stock’s reaction is still quite measured (+2% this Monday, therefore).

“The market had already anticipated announcements like this given the strong progress of the stock in recent weeks. And then some investors may say that there is still a long way to go before reaching 2 billion euros, and, finally, we can ask ourselves if this figure of 2 billion is enough”, explains a financial intermediary based in London.

However, this market expert argues that “Alstom got a good price from the activities sold, which means that they certainly had several offers” and were therefore right to sell this activity, he judges.