MONTREAL - The giant Quebec pension fund Caisse de depot et placement du Quebec (CDPQ) Thursday entered into an agreement with Bombardier Transportation for a $1.5 billion investment in its newly-created holding company, Bombardier Transportation (Investment) UK Ltd ("BT Holdco").

Under the terms of the agreement, CDPQ will acquire 30 percent equity stake in BT Holdco, Bombardier's rail transportation business, subject to annual adjustments related to performance.

The transaction will be executed through a private placement and values Bombardier Transportation at $5 billion, the companies announced in a joint statement.

The investment has been approved by the Boards of Directors of Bombardier and CDPQ, Canada's second largest pension fund.

BT Holdco will own all of the assets of Bombardier's current Transportation business segment, with its operational headquarters remaining in Germany. It will be governed independently by a new Board to be composed of seven members, three of which will be named by CDPQ.

Alain Bellemare will chair the Board while Dr. Lutz Bertling, President, Bombardier Transportation, will continue in his current role.

The transaction concludes the review of financing options previously announced for Bombardier Transportation.

Ahead of the agreement with CDPQ, Bombardier's Board of Directors examined a wide range of strategic options for its rail business.

After a thorough review process, including an initial public offering and a competitive international auction process for the private placement of a minority stake, the Board of Directors of Bombardier decided on "the sale of 30 percent equity stake in Bombardier Transportation to CDPQ, is the most attractive option", Bombardier said.

"The transaction announced today, when completed, will crystallize the value of Bombardier Transportation and strengthen Bombardier's financial position, with no increase in debt. The funds to be received by BT Holdco from the transaction will be distributed to Bombardier and Bombardier intends to use the proceeds for general corporate purposes," the Montreal based company stated.

The investment by CDPQ comes less than a month after the provincial government announced a bailout of more than $1.3 billion in the company's struggling CSeries jet program. Bombardier posted a loss of US$4.9 billion in the third quarter.

The investment by CDPQ is expected to steady Bombardier Transportation's financial position.

"This investment by CDPQ, which has a long history as one of our major investors, is a testimonial to the growth potential of the rail industry and to Bombardier's leadership in seizing the opportunities this market offers on a global scale," said Alain Bellemare, President and Chief Executive Officer of Bombardier.

"Bombardier and CDPQ have one common objective: leveraging Bombardier Transportation's innovative portfolio of products and services, engineering talent and worldwide presence to drive margin expansion," he added.

The pension fund stated that it is betting on Bombardier Transportation, which sells subway cars and other mass transit systems.

"Bombardier Transportation is a global leader in the rail industry, with a robust backlog, predictable revenues, and meaningful potential for growth. The strong performance incentives that are at the heart of this transaction and management's plan to improve execution have a single focus: creating more value at Bombardier Transportation," said Michael Sabia, President and Chief Executive Officer of CDPQ.

"The hybrid investment instrument designed for this transaction allows our depositors to benefit from the improving performance of Bombardier Transportation with its equity-like features, while protecting their capital through its bond-like characteristics. This investment is structured with the goal of delivering double-digit returns," added Sabia.

Under the terms of the agreement, the stake of CDPQ will depend on the performance of Bombardier Transportation. For each of the first five years following the closing date, CDPQ's ownership (on conversion) and return will be subject to upward or downward annual adjustments, based on a performance target jointly agreed to as part of Bombardier Transportation's business plan.

If Bombardier Transportation outperforms its business plan, CDPQ's percentage of ownership on conversion of its shares decreases by 2.5 percent annually, down to a minimum threshold of 25 percent. In this circumstance, the convertible shares' minimum return also decreases from 9.5 percent to a floor of 7.5 percent.

Conversely, should Bombardier Transportation underperform relative to its plan, CDPQ's percentage of ownership on conversion of its shares will increase by 2.5 percent annually, up to a maximum of 42.5 percent over a five-year period. In this case, the convertible shares' minimum return also increases by 2.5 percent up to 12 percent.

Recognizing the importance of Bombardier's financial stability, the parties have agreed to a cash reserve threshold of at least $1.25 billion, based on a jointly agreed upon formula.