Bombardier ran out of money

There is no way to explain Bombardier selling out a 50.01% stake of its C-series jet (leaving it with a minority 31% stake, with the Government of Quebec with a 19% interest) to Airbus for zero other than the simple fact that they ran out of money. They couldn’t keep things going for a few more years while all of the trade dispute issues played out.

With airbus fully incentivized to starting marketing the C-Series (and acquiring most of any industrial secrets contained within the aircraft design), they will be better positioned than Bombardier was with respect to the upcoming Boeing trade dispute (which will be a multi-year bloody battle, especially since Boeing has the full support of the US Government). One question internally for Airbus is how they will reconcile selling Airbus 319’s instead of CS300’s with this arrangement. Or are they just doing this to shut down the aircraft entirely?

The key paragraph is:

At closing, there will be no cash contribution by any of the partners, nor will CSALP assume any financial debt. It also contemplates that Bombardier will continue with its current funding plan of CSALP and will fund, if required, the cash shortfalls of CSALP during the first year following the closing up to a maximum amount of US$350 million, and during the second and third years following the closing up to a maximum aggregate amount of US$350 million over both years, in consideration for non-voting participating shares of CSALP with cumulative annual dividends of 2%, with any excess shortfall during such periods to be shared proportionately amongst Class A shareholders.

So Bombardier’s downside is US$700 million over the next couple years.

Long term, assuming this isn’t an agreement by Airbus to effectively shut down the C-series program, this should bode well for the C-Series program, which should remain in Canada and will have a more powerful marketing partner, but this is a negative for any upside to Bombardier – the promise of a wildly profitable commercial jet program will have now shrunk down to a 31% stake.

If I was going to use an analogy here, it is “Would you like 31% of something, or 100% of nothing?”. Bombardier seems to have taken the first option.

Bombardier has plenty of other cash-positive business units (Transportation and smaller-scale aircraft) that will be bringing in cash flows, but most of the upside in the business (via the promise of significant C-Series jet revenues) is gone.

I continue to hold a much-diminished stake of BBD.PR.C and BBD.PR.D shares, of which I am tepid on valuation and still do not see any imminent (I added in this word a couple hours after making this post!) dividend risk despite this deal.

10 thoughts on “Bombardier ran out of money”

  1. I would rank this as credit neutral to minutely positive. I would change my mind if I saw some evidence that there is actual marketing substance to Airbus and the C-Series post-deal closure (i.e. this will materially improve C-Series business performance going forward).

    Right now I see this as a “sell before losses get larger” scenario, so the downside is limited, hence my thought on credit. The corp last quarter did an EBIT run-rate of $250M ex-C-series, and this is on a debt of $9 billion, so they’re not financially in rosy shape either, but presumably in their medium-range plans, a decent execution on C-Series will accrue enough value via the 30% partnership stake to lift them up.

    But if transportation or business aircraft or engineering starts to falter… watch out below. The entity is still hugely leveraged and now it is guaranteed the Canadian government won’t even think of any future bailouts their way even if there wasn’t an imminent election!

  2. Thanks Sacha.

    The preferred are reacting positively to the news. Are you seeing the bonds react as positively?

    I listened to the call and they certainly are spinning it positively. It seems like most analysts had almost zero value for the C series anyway.

  3. I’m going to guess the market clearly sees this scenario of it being “genuine” instead of shutting down the C-Series since Bombardier’s debt is trading a good 100 basis points tighter (lower) along their yield curve.

    A good time to sell?

  4. I’m inclined to look at this the way Bellemere says he does – they own half as much of something twice as big, with substantial de-risking (of sales, US duties, etc). I highly doubt Airbus is doing this to shut down the program – if they are, it will make a heck of a movie someday.

  5. Yup, my initial post was under a large fog of war before the CC. 319 orders were minimal. Wonder if this will cut into 320…

    But all of this is going to take a couple years to achieve, although the psychology behind orders and marketing clearly start now.

  6. Striking the financing while the iron’s hot – a smart decision in my opinion even if they’re replacing less expensive debt with more expensive debt! They’re raising more money than the 2019’s they’re retiring. With respect to their preferred shares, nothing to do but just collect dividends at the current price levels…

    Also I would think given their yield curve that the bond issue would trade up initially.

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