Shareholders will take hit for discount offering

The parallels are eerie.

A dozen years back, Bombardier Inc. named Paul Tellier as its chief executive. Mr. Tellier was a distinguished public servant, having served as Clerk of the Privy Council, as well as a prominent businessman who was chief executive of Canadian National Railway Co. for more than a decade.

A few months after Mr. Tellier took over, Bombardier released its fiscal 2003 results that showed a $615 million net loss, a recapitalization program, a cut to its dividend and an equity offering of at least $800 million. After an extensive road show, with Mr. Tellier leading the charge, Bombardier ended up raising $1.2 billion via the sale of shares at $3.25 each — a 10% discount to the market. CIBC and UBS led the offering.

Fast forward to February 2015: Bombardier announced its 2014 results: on a non-standard measure it made adjusted net income of $648 million, it suspended its dividend, named a new CEO and announced an equity raise of about $600 million. The one difference with 2003: shareholder approval is needed to issue the equity.

The stock sank on the news and closed the day at $2.69, down 11.5%. The drop was due to many factors, one of which is the decision to raise new equity.

The new challenge is to raise $600 million of equity capital — or more than 10% of Bombardier’s market cap. While $600 million is not a big ask, 10% is.

So how will Bombardier go about it?

Let’s start with the conclusion: barring some unforeseen circumstances, it will raise that amount. It will achieve that because the price at which the shares will be offered will be low enough to clear the market. While that’s a tough nut for existing shareholders, Bombardier will be required to issue more shares than otherwise.

“Sure, at some price with some make up of investors, there is probably a deal to do,” noted one banker. Adds another: The markets are telling you that it’s doable at a level. It looks like a relatively straightforward public offering.” But lots of questions remain. For instance, which firm will underwrite the financing; and whether it will be done via a bought deal (the norm in Canada) or through a marketed offering (meaning the new management team hits the road and explains the new strategy.) In general, a bought deal means a larger discount compared with a marketed offering.

One possibility is Bombardier lining up some institutional investors who would purchase via a private placement – and doing the rest through a public offering. That structure has been used in the past on both large and small financings. In early 2008, CIBC used it to raise $2.94 billion of which institutions provided $1.5 billion; last September, Pro-REIT raised $26.4 million — of which $5 million came from a private placement.

What seems unlikely is that Bombardier will be required to unwind its dual class of shares. “It’s possible, but that would be a deeply negotiated scenario where Bombardier would go to deep-pocketed investors — either new or existing [who would demand change]. I don’t think they have to go to that level,” added one banker.

Noted another: Collapsing share structures “seems to occur when people are in tough. That doesn’t feel like what’s being contemplated here.”