The advertised turnaround at Bombardier Inc. is nothing of the kind. Investors should be wary of a promised upturn in the fortunes of this humbled former industrial giant.
Bombardier says it has put the finishing touches on its five-year turnaround — a long-running asset liquidation, in fact, and not a strategic turnaround plan — with its Feb. 17 announced sale of its rail division to France’s Alstom S.A. for about $9 billion.
With the sale of the rail division, Bombardier Transportation (BT), Bombardier is finally a lean enterprise focused on its sole remaining asset, business jets.
It can use the proceeds from the BT sale to pay down its onerous debt load, and is at last poised for consistent profitability as a “pure-play” maker of business jets.
In announcing the Alstom deal, Bombardier CEO Alain Bellemare began his victory lap, declaring “the beginning of a new and bright chapter for the company.”
But the stock market isn’t buying that story. Bombardier stock, which had already lost nearly 75 per cent of its five-year peak 2018 value, fell even further on the Alstom deal news, by a hefty 15 per cent.
And with good reason.
Bombardier’s future is still riddled with profound uncertainties, including one rather unsettling question: Is the company selling the wrong division?
The problem with selling BT
Bombardier Transportation is the larger and more profitable of Bombardier’s two remaining divisions. Indeed, BT is among the most profitable of the world’s leading rail-equipment makers.
Siemens leads the pack in operating profit margins, at 11 per cent. BT is next, with an impressive 8.7 per cent. Alstom is a laggard, at 7.1 per cent.
In the past four years, BT’s profits have grown significantly faster than those of Bombardier Aviation (BA), the business-jet division.
BT boasts average annual growth in EXIT (earnings before interest and taxes) of 9.6 per cent since 2016. By contrast, annual EXIT growth at BA has been a miserable 0.5 per cent in that period.
Bombardier Aviation has been losing market share for years.
From a peak of just over 30 per cent in 2008, BA’s market share has fallen to 18 per cent, a tad above Gulfstream (16 per cent). The market leader is Textron Inc. (Cessna, Beechcraft), with about 25 per cent, according to 2018 statistics from the General Aviation Manufacturers Association.
The outlook for trains versus planes
World demand for passenger rail equipment is almost inexhaustible. And BT is one of a mere handful of enterprises able to satisfy it.
The public transit systems BT designs, builds and maintains on every continent are increasingly seen as crucial in the fight against climate crisis.
They are also prominent in the urban-renaissance movement worldwide to make cities more livable by removing GHG-emitting vehicles from the streets.
By contrast, aviation is a target of environmentalists and their “plane shame” campaigns. And the kind of elite luxury aircraft in which BA specializes are acutely vulnerable to environmental backlash.
The global business-aircraft sector shows no signs of breaking out of a years-long slump.
The cash demands of Bombardier Aviation will be considerable. As rivalry intensifies in a stagnant market for business aircraft, Bombardier will be compelled to lavish development funds on the aging products in its lineup, notably its Challenger brand.
And BA must contend with formidable competition.
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BA’s chief rivals are owned by deep-pocketed aerospace and defence contractors, including Textron, General Dynamics Corp. (Gulfstream), Boeing Co. (Embraer) and Dassault Aviation S.A. (Falcon).
A debt that won’t go away
The long-running crisis at Bombardier is centred on its unmanageable debt load of $12.4 billion.
Securities analysts believe that a sale of Bombardier Aviation would fetch about $9.8 billion for Bombardier. The proceeds could be used to wipe out more than two-thirds of that debt.
By contrast, the $9-billion headline sale price of BT actually works out to net proceeds to Bombardier of as little as $5.6 billion.
BA is wholly owned by Bombardier. But BT is about one-third owned by the Caisse de dépôt du Québec, the giant pension fund manager.
The Caisse will reap one-third of the BT sale proceeds. And settling BT pension obligations will take as much as $1 billion more.
Which means the “new” Bombardier would still be saddled with an estimated $3.3 billion in debt, supported by a notoriously volatile private-jet business. As a weak player in that industry, the new Bombardier would be takeover bait.
And that might be what Bombardier has in mind — the sale of its last remaining business.
Last year, Bombardier commenced talks for selling BA with Textron and U.S. private equity giant Carlyle Group. BA’s ultra-long-range Global 7500 jet, one of the most technologically advanced business planes in the skies, would be an ideal fit for a Textron overweighted with slower, smaller and lower-margin aircraft.
But the legacy of company founder Joseph-Armand Bombardier would not end with the sale of Bombardier Inc.’s last remaining business.
That legacy thrives in BRP Inc. (Bombardier Recreational Products), the original business Bombardier started with in 1942, spun off from Bombardier Inc. in 2003.
Profits have more than doubled at the Valcourt, Que.-based BRP in the past five years, and its market capitalization of $6.2 billion exceeds that of its former parent ($3.2 billion).
The personal fortunes of the Bombardier and Beaudoin families that control Bombardier Inc. are actually vested in their roughly one-third stake in BRP, from which they have drawn millions of dollars through secondary stock offerings.
With a lofty price-earnings multiple of 16.6, BRP is not a cheap stock. But BRP is a business with a future, a descriptive that might not apply to its erstwhile parent.
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