Turn­around plan no cure for Bom­bardier’s debt headache

The Globe and Mail (Ontario Edition) - - REPORT ON BUSINESS - ANDREW WIL­LIS

You’ve been to a party, you had a few too many. What do you do? Pop a few Aspirin and pound back wa­ter be­fore bed, to get ahead of the hang­over.

That is Alain Belle­mare’s cur­rent ap­proach to run­ning Bom­bardier Inc. The Mon­treal-based chief ex­ec­u­tive is do­ing ev­ery­thing in his power to get in front of re­pay­ments on US$9.3-bil­lion of debt. The loans are a hang­over that stems in large part from a party that took place be­fore Mr. Belle­mare ar­rived in 2015, when Bom­bardier dropped US$6-bil­lion on a com­mer­cial air­craft business, only to fi­nally cut all ties with the project Thurs­day.

For Bom­bardier, debt re­lief is ex­pected to come from the sale of one of the com­pany’s two re­main­ing di­vi­sions. Mr. Belle­mare is run­ning si­mul­ta­ne­ous talks in Europe and North Amer­ica aimed at find­ing new own­ers for ei­ther the com­pany’s rail or business-jet unit.

There are dis­cus­sions play­ing out with France’s Al­stom SA and Ja­pan’s Hi­tachi on the train side, while on the plane side, Bom­bardier is talk­ing to U.S. con­glom­er­ate Tex­tron Inc. and pri­vate-eq­uity gi­ant the Car­lyle Group. While the process is con­fi­den­tial, Euro­pean me­dia report the sale of the train-man­u­fac­tur­ing business is the most likely sce­nario.

An­a­lysts say Mr. Belle­mare is con­duct­ing this auc­tion with a sense of ur­gency, and ques­tioned that ap­proach dur­ing a con­fer­ence call Thurs­day to dis­cuss Bom­bardier’s fi­nan­cial re­sults, which were head­lined by a US$1.6-bil­lion loss last year, and free cash flow that was be­low the Street’s al­ready re­duced ex­pec­ta­tions.

“Why is there this sort of quick look to do all of this, if the business is in fact get­ting bet­ter?” Gold­man Sachs an­a­lyst Noah Po­ponak asked Mr. Belle­mare on the call. He said: “It’s start­ing to look more like an as­set liq­ui­da­tion than a turn­around.”

“It’s the bal­ance sheet. It’s not com­pli­cated,” Mr. Belle­mare an­swered, char­ac­ter­iz­ing the com­pany’s moves as an at­tempt to pay down debt be­fore any cri­sis hits. He told the Gold­man an­a­lyst: “It’s about be­ing pro-ac­tive.” He went on to say that Bom­bardier can take its time in mak­ing any de­ci­sions. With more than US$4-bil­lion of cash and US $5.5 bil­lion in liq­uid­ity, and no ma­jor debt re­pay­ments due un­til late 2021, Mr. Belle­mare said the com­pany has the fi­nan­cial flex­i­bil­ity needed to com­plete a turn­around that started five years ago.

How­ever, he also of­fered fi­nan­cial guid­ance that was sig­nif­i­cantly be­low what the Street was ex­pect­ing prior to the com­pany’s re­lease of pre­lim­i­nary re­sults in Jan­uary. Sales are ex­pected to rise from US$13.7-bil­lion last year, ex­clud­ing busi­nesses that are be­ing sold, to US$15-bil­lion this year. Pre­vi­ously, an­a­lysts ex­pected Bom­bardier to sell more than US$16-bil­lion of planes and trains.

Bom­bardier’s free cash flow and its EBITDA mar­gin (that’s earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion) are also ex­pected to fall well short of what was fore­cast. Ratch­et­ing back an­a­lysts’ ex­pec­ta­tions while high­light­ing the need to pay down debt made for a down­beat con­fer­ence call.

The true test of Mr. Belle­mare’s turn­around plan is how much money Bom­bardier raises if it does sell a business. Just like a few Aspirin and glasses of wa­ter don’t hold off the morn­ing-af­ter headache, sell­ing the trans­porta­tion divi­sion might not gen­er­ate enough money to truly fix the com­pany’s debt-heavy bal­ance sheet.

An­a­lyst Cameron Do­erk­sen at Na­tional Bank Fi­nan­cial ran the num­bers Thurs­day and said in a report that Bom­bardier can ex­pect to get be­tween US$5-bil­lion and US$7-bil­lion for its rail unit. Be­fore Bom­bardier gets a penny, it will need to hand a third of the cash to the Caisse de dépôt et place­ment du Québec for its stake in the unit. Mr. Do­erk­sen said up to an ad­di­tional US$1-bil­lion may need to be set aside to cover pen­sion costs.

Bom­bardier could sell its trans­porta­tion divi­sion and still carry a rel­a­tively high debt load of US$2-bil­lion on a cycli­cal lux­ury-jet business. While he’s bullish on Bom­bardier’s stock, Mr. Do­erk­sen said sell­ing the avi­a­tion divi­sion, which could fetch an es­ti­mated US$7.4-bil­lion, is the bet­ter way for­ward for share­hold­ers.

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