Talk of Bombardier breakup in the air
A breakup may be Bombardier Inc.’s best option for gaining liftoff.
Shares of the maker of planes and high- speed trains have slumped almost 40 per cent in a year, while rivals such as Boeing Co. and Airbus Group NV rallied. Delays and cost overruns and delays on the new CSeries jetliner dragged Bombardier to its first annual loss in almost a decade last year. The company’s debt is more than twice its market value.
Chief executive officer Alain Bellemare, who joined Montrealbased Bombardier in February, said this week he’s leaving “all options” on the table. That has some analysts and investors predicting asset sales that could range from the Learjet division for as much as $750 million US to a stake in the rail business, which had 2014 revenue of more than $9 billion.
“They really have to focus this company and get rid of stuff that’s nice to do, but not critical to do,” Nick Heymann, a William Blair & Co. analyst in New York, said in a telephone interview. “That way they can get the debt down. You have to sell businesses that are not necessary so that this company can get back to investment grade.”
Bombardier’s controlling family would need to back any such plans and probably doesn’t feel the need to consider a breakup, at least not now, said George Ferguson, a Bloomberg Intelligence analyst. Even so, there may be interested buyers. Textron Inc. and Embraer SA may be drawn to Learjet, according to Macquarie Capital Markets, while Heymann sees France’s Alstom SA as a potential suitor if Bombardier offers a stake in its rail unit.
“You would hope the new CEO has some leeway to think about asset sales,” Bob Sharpe, a vicepresident at Heartland Advisors Inc., said by phone from Milwaukee. Heartland owns Bombardier shares.
Isabelle Rondeau, a spokeswoman for Bombardier, said Thursday that the company has no comment on possible asset sales beyond what executive chairman Pierre Beaudoin, the former CEO and a grandson of the founder, said on a Feb. 12 conference call with analysts and reporters.
Bombardier “will explore other initiatives, such as a potential participation in industry consolidation, in order to deleverage the company,” Beaudoin said on the call.
The company had about $7.4 billion of long-term debt as of Dec. 31 before borrowing $2.25 billion via a bond sale last month. Bombardier is also raising $868 million of equity, a transaction that requires shareholder approval on March 27.
Meantime, testing continues on the CSeries, Bombardier’s biggest jet to date.
With seating for as many as 160 passengers, the plane is intended to challenge Airbus and Boeing’s single-aisle models.
Bombardier has spent about $4 billion on the program as of Dec. 31. About $1.1 billion in expenses remain to finish flight tests on the plane and meet a goal of starting deliveries this year, according to a slide presentation in February when Bellemare, 53, was named CEO after leaving United Technologies Inc. a month earlier.
With the stock slumping, Bombardier is now valued at just 8.3 times estimated earnings for 2015, according to data compiled by Bloomberg. Boeing, Airbus and Textron all trade for more than double that multiple, the data show.
Selling off pieces could reassure investors that Bombardier can handle rising interest payments, according to John Stephenson, CEO of Toronto-based Stephenson & Co.
“They need to clean up the debt,” said Stephenson, a former Bombardier shareholder who has no plan to resume buying for now. “That’s the big worry. Everyone agrees the stock is cheap from a valuation standpoint. Some consolidation and cleanup would really help.”