A Bombardier sign sits at a train station in Bern, Switzerland, on Oct. 24, 2019.DENIS BALIBOUSE/Reuters
Bombardier Inc. is racing to strike a deal to sell one of its two main businesses and pay down debt as its corporate dismantling hits a crescendo. Its future hangs in the balance.
The company is running simultaneous sets of talks in Europe and North America on selling either its rail or luxury-jet unit, according to information gathered by The Globe and Mail. Discussions have been held with France’s Alstom SA and Japan’s Hitachi on the train side and U.S. conglomerate Textron Inc. and private equity giant Carlyle Group on the plane side, sources confirmed.
The outcome will reshape one of Canada’s most storied and troubled industrial manufacturers – either launching it on a new course with its US$9.3-billion debt under control or sending it spiralling into the unknown.
“Bombardier has to do something big to resolve this,” because its turnaround has misfired, said Louis Hébert, a corporate strategy specialist at Montreal’s HEC business school. “To change organizations and implement those changes and for them to have a financial impact takes time. And Bombardier is short on time.”
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On one flank, Bombardier is in talks to sell its private-jet business to Cessna-maker Textron, according to people familiar with the situation. Private-equity firm Carlyle is also involved in the discussions as a potential investor in the business, one of the people said. Blackstone Group considered making an offer but has backed away.
Carlyle could back Providence, R.I.-based Textron in its purchase of the Bombardier unit, with either or both taking a minority interest, the person said. The potential structure of a deal has not been decided and a group deal is possible, the person said. Carlyle declined to comment on Friday.
The Globe and Mail is not identifying the sources because they were not authorized to speak to the media.
Bombardier makes business jets under the trade names Learjet, Challenger and Global at list prices ranging from US$9.9-million to US$75-million.
In Europe, Bombardier has revived efforts to try to find a buyer or merger partner for its Berlin-based train business. The company has approached Alstom and Hitachi in recent months in a bid to strike a deal that could bolster their ability to better compete with China’s state-backed operator CRRC, sources confirmed.
Bombardier is a willing seller. But on trains, it has yet to strike an agreement on the terms it is seeking.
There are concerns that a deal to sell the rail business will still not yield enough proceeds to fix the balance sheet once Bombardier buys back a roughly 30-per-cent stake in the unit held by pension fund manager Caisse de dépôt et placement du Québec. Desjardins Capital Markets estimates Bombardier would have to initiate an equity offering worth US$1-billion after selling the train unit because the remaining jet business is more vulnerable to economic cycles.
Three banks are acting as advisers in the potential transactions: Citibank, Credit Suisse and UBS. All of them were hired for their expertise in rail transport and aviation.
Textron talks with Bombardier were first reported this week by The Wall Street Journal. Bombardier and Textron declined to comment. Alstom declined to comment, while Hitachi could not be reached.
“Any sale is going to be a very challenging process,” with potentially lengthy regulatory reviews and political fallout, said Chris Murray, an analyst at AltaCorp Capital. “It’s not like showing up on Kijiji and saying ‘Hey who wants my stereo speakers?’ ”
Five years after being named chief executive officer of Bombardier, Alain Bellemare finds his master plan to fix the company in disarray. Topping his list of headaches is chronic underperformance at the train business, where cash isn’t coming in as expected. The unit, known as Bombardier Transportation (BT), has had four presidents in less than a decade.
BT has a strong order backlog – US$35.1-billion as of 2019′s third quarter – and makes money, but its earnings have been on the wane. In London, problems in reaching technical milestones, including software certification, for the city’s Overground trains have delayed deliveries and forced Bombardier to absorb extra costs. In Switzerland, Bombardier experienced software and door problems on the trains it delivered years late to Swiss rail operator SBB. As compensation, Bombardier agreed to supply its customer with a few extra trains free of charge.
Sales of luxury private aircraft are holding up, but Bombardier’s flagship Global 7500 jet is in its early phase of deliveries and requires further capital to build up production. The company warned last month it would report a consolidated loss of US$130-million on adjusted earnings before interest and taxes for its recently completed fourth quarter.
To add to the trouble, joint venture partner Airbus SE is asking for more money to help increase production of the A220 airliner (formerly known as Bombardier’s C Series) – and that’s money Bombardier does not have. Bombardier is expected to announce it will exit the partnership, with its 34-per-cent stake potentially being bought by Airbus.
Meanwhile, debt repayments loom. Starting next year, a string of bonds topping more than US$1-billion annually will hit maturity. The company is carrying a pension liability on its balance sheet of US$3.2-billion.
Much of that debt comes from the company’s decision to launch the C Series, a single-aisle commercial plane seating 120 to 140 passengers that tipped into competition with the smallest jets made by Boeing and Airbus. Costs to develop the C Series ballooned to an estimated US$6-billion, and the overruns were funded largely by borrowing. Quebec also came to Bombardier’s rescue to stave off its collapse, making a US$1-billion investment in the C Series program.
By handing over control of the C Series to Airbus in 2017, Bombardier freed itself from operational responsibility for the aircraft – selling it and building it. But debt from the project lingers on Bombardier’s balance sheet, and the company remains on the hook for more than US$350-million of costs for the plane.
The challenge of paying down debt is further complicated by a deal Bombardier cut with the Caisse in 2015 in which the provincial fund manager took a minority stake in BT. The Caisse is guaranteed a 15-per-cent annual return on this stake, which makes the investment a relatively expensive form of capital for Bombardier.
Bombardier has current cash on hand of about US$2.6-billion, and proceeds worth US$1.1-billion are scheduled to come in this year from previously announced sales of its CRJ regional jet and aerospace-component manufacturing businesses. But with the company still burning more cash than it generates and no clear sense on when that pivotal marker might reverse, credit risk worries about Bombardier have resurfaced.
“They do have a lot of debt, and for a company that hasn’t generated cash flow in years, it’s troublesome,” said Jamie Koutsoukis, senior analyst at Moody’s Investors Service, which has a non-investment grade rating of B3 on Bombardier. “It’s onerous, even if they did [pull off] a turnaround.”
While there’s been a big selloff in Bombardier shares since July, 2018, all of Bombardier’s bonds throughout its capital structure are still trading at 95 cents or more. That suggests debt holders are not panicking just yet.
By trying to sell one of its two main businesses now, Bombardier is trying to solve its capital structure once and for all and make sure that panic never happens. It’s an attempt to pay down debt more quickly and decisively well before it comes due. In other words, sell and shrink to survive.
“The conclusion that the board of directors has reached … is that having two business units with a level of debt approaching US$9-billion is very difficult,” Quebec Economy Minister Pierre Fitzgibbon told Radio Canada this week. “[It’s possible] one business unit will remain for Bombardier. And by the way, that wouldn’t be a bad thing.”
What’s taking place at Bombardier amounts to “financial re-engineering,” Mr. Fitzgibbon said. “There are many scenarios.”
Bombardier is controlled by the company’s founding Bombardier-Beaudoin family through a special class of multivoting shares. Its board includes four members of the family and nine independent directors, plus the CEO. Ten of the 14 directors have served Bombardier for five years or fewer.
The ramifications of a reshaped Bombardier are immense, particularly if it sells its luxury-jet unit. The business employs about 10,000 people in the Montreal area alone, and Quebeckers have expressed worries about job losses under new ownership.
There is anger, too, in Quebec that Mr. Bellemare and other senior executives have been paid millions to preside over the company’s taxpayer-supported dismemberment. Mostly, however, there is shock that the company finds itself having to take drastic action again after it was pushed to near-collapse in 2015.
Bombardier is not asking for any government money to rebuild its future this time, partly because the sums required would be too great. Any major aid package also runs the risk of running afoul of World Trade Organization rules.
“This is a company that was innovative and untouchable in so many ways” in the 1990s, said aerospace consultant Rolland Vincent, a former Bombardier executive. “To see it go all the way to where it is, is sad."