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Winnipeg Free Press - PRINT EDITION

A $116-million bus exploration

Brazilian manufacturer signs deal with New Flyer

Posted: 01/25/2013 1:00 AM | Comments: 0


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New Flyer Industries' 11-month discussions leading up to this week's announced $116-million investment by Brazilian bus maker, Marcopolo S.A. was fittingly called Project Explorer.

It also signals New Flyer will now be doing some serious exploration of acquisitions.

With such a large cash infusion -- it will land in two batches stretched out over 14 months -- New Flyer will have a war chest to do acquisitions and diversify its product offering, something it has stated in the past it wanted to do.

Paul Soubry, New Flyer's CEO, would not talk about specifics, but along with the equity investment that gives Marcopolo 19.99 per cent of New Flyer and a seat on the board, there was also a memorandum of understanding between the two companies.

Marcopolo is the second-largest bus maker in the world -- it makes about 32,000 buses per year, the same number New Flyer has made throughout its entire history -- and Soubry said it has all sorts of expertise, including global parts sourcing, New Flyer may be able to use to its advantage.

In turn, Marcopolo is interested in what New Flyer has done with alternative propulsion systems such as hybrid electric, compressed natural gas and the work it is doing on an all-electric bus.

"From a defensive point of view, they said they were planning to come into North America and I would rather be working together with them rather than fighting them," Soubry said. "We're going to set up a task force and start working down the project list."

He said in their lengthy courting it was agreed both companies are in sync when it comes to their styles of business and handling of their respective stakeholders.

In a prepared statement, José Rubens de la Rosa, CEO of Marcopolo, said, "The investment is in line with Marcopolo's growth strategy and marks its definitive entry into the U.S. and Canadian markets, two of the most sophisticated and advanced in the world."

But the North American bus industry was hit hard by the global recession of 2008-09 and its aftermath and is only now recovering. Daimler shut down its Orion bus division last year, leaving only four competitors in North America, with New Flyer the largest of the group.

"The deal seems like a vote of confidence in New Flyer and its position in the North American market when you appreciate that Marcopolo is one of the leading bus manufacturers in the world," said Michael Roschlau, CEO of the Canadian Urban Transit Association.

Marcopolo agreed to pay $10.50 per share, a 26 per cent premium over the average of the last 60 days trading and the market responded Thursday with heavy trading in New Flyer shares, which closed up 60 cents to $10.00, a new 52-week high.

But with that new cash on the books, there is some pressure for Soubry and his management team to deploy the capital wisely and fairly quickly.

"Like me, most folks did not anticipate they needed that much capital," said Trevor Johnson, an analyst with National Bank Financial, who follows New Flyer. "This is not free capital. There is a cost of equity -- something like $6 million to $7 million per year (on about six per cent yield that New Flyer pays in dividends to its shareholders). You have to make sure that it's at least offset with a return on capital and get some growth."

Soubry said not to expect them to come up with a handful of acquisitions right away, but they are prepared to act.

"We are going to put that money to work and not have it sitting on our balance sheet sucking up dividends," he said.

Johnson said New Flyer is looking at vertical integration and growth in the aftermarket business. Acquisition of parts manufacturers and distribution opportunities would be in line with that strategy.

Meanwhile, New Flyer is getting ready to start building the MiDi bus as part the long-term joint venture it signed last year with Alexander Dennis Limited, the U.K.'s largest manufacturer of medium, heavy-duty and double-deck transit buses.

The prototypes are being tested and will start hitting the production line by the end of this year at New Flyer's St. Cloud, Minn., plant.


New investor met with big new order


NEW FLYER is on the verge of huge new order from the Los Angeles County Metropolitan Transportation Authority (LA Metro).

On Thursday, LA Metro's board of directors approved a multi-year order for 550 40-foot New Flyer compressed natural gas buses for $302 million and an option for an additional 350 buses.

It's a huge order that will bolster New Flyer's production schedule for years, but the company is not crowing about it just yet because it has been burned in the past in a similar scenario.

In 2009, the board of the Chicago Transit Authority approved a major order with New Flyer and the company started making the buses only to find out Chicago did not have the money to pay for them.

New Flyer CEO Paul Soubry said the order will not be added to its backlog until a signed contract is in place.

"The contract was passed without comment or discussion or any protest so we are very confident it will proceed as planned," Soubry said. "Documents have started to move and it could be as early as next week or it could be four weeks (before there is a signed contract.)"

If all the options are picked up, the contract would be worth just less than $500 million.


-- Cash

Republished from the Winnipeg Free Press print edition January 25, 2013 B4

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