Bombardier stock rout trims odds of rail unit buyback
Low share price makes repurchasing pension fund’s minority stake less appealing
A recent sell-off in Bombardier Inc.’s stock and bonds means the Canadian manufacturer will probably postpone a multibillion-dollar buyback of a minority stake in its rail unit that would allow it to keep all the earnings from its biggest business.
Bombardier has the option to repurchase the Caisse de dépôt et placement du Québec’s minority stake in the rail operation starting in February as part of a 2016 investment by Canada’s second-biggest pension fund. Investor concern over the company’s cash resources, coupled with an unwillingness by Montreal-based Bombardier to sell debt or equity at depressed levels, likely means a buyback is off the table for now, analysts said.
The recent stock drop “makes a buyback much more difficult,” Seth Seifman, an analyst at JP Morgan Chase & Co., said in a telephone interview. “In an ideal world, they would buy back the Caisse’s stake because it’s an expensive piece of capital, but in this world right now, it’s gotten much harder. Now the option of raising equity is far less appealing and therefore highly unlikely.”
Class B shares of Bombardier plunged 37 per cent in Toronto last week after the plane- and trainmaker slashed its 2018 and 2019 cash-flow forecasts on Nov. 8. Bombardier’s high-yield notes led declines among U.S. dollar issuers Friday. Stock and bonds rebounded Monday.
Caisse de Depot invested $1.5 billion (U.S.) in Bombardier Transportation in exchange for a 30 per cent stake that provides guaranteed returns. The holding was reduced to 27.5 per cent earlier this year after the rail business exceeded 2017 financial targets.
Seifman estimates Bombardier would have to pay more than $2 billion for the stake. He and other analysts have said Bombardier would probably need to issue debt, equity or a combination of the two to finance a transaction for the rail stake.
Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, said Tuesday in a note there’s a “low probability” of a buyback given “unfavourable market conditions.” He estimates the “fair market value” of the Caisse’s holding at about $2.2 billion.
The delayed buyback means Bombardier won’t keep all of the earnings from the railway business, which accounted for almost 60 per cent of thirdquarter revenue. The unit generated earnings before interest, taxes and special items of $187 million on sales of $2.14 billion. Rail will account for an even bigger slice of revenue once Bombardier completes the sale of its Q400 turboprop operations.
Bombardier will likely end 2018 with about $3 billion of liquidity, chief financial officer John Di Bert said Nov. 8. Asset sales announced that day will likely generate an additional $900 million of cash when the transactions close in the second half of 2019.
“They have the cash they need to run the business,” Seifman said. “The company is in considerably better than shape than it was in 2015. It’s unfortunate that they’ve hit a very rough patch.”
A buyback of the Caisse “is definitely one area that we’d look at to deploy capital,” Di Bert told analysts on the conference call this month.
It’s a “tremendous asset, we want to continue to operate it, and we do see the value in continuing to assess the buyback option,” the CFO said.