Bombardier Speeds Dismemberment with A220 Deal, Other Talks

(Bloomberg) -- Bombardier Inc., which once made everything from snowmobiles to commercial jets, is poised to become a shadow of its former self as the Canadian manufacturer accelerates asset sales to reduce debt.

The company is completing its exit from commercial aerospace with the sale of its stake in the Airbus SE A220 program, once known as the C Series, to the European planemaker. Bombardier said in a statement it is also pursuing other “strategic options to accelerate deleveraging.” The company is near a deal to sell its rail-equipment unit to Alstom SA, Bloomberg News reported.

“The C Series was a cash drain,” Bombardier Chief Executive Officer Alain Bellemare, said in a call with analysts Thursday. “The strategy was always to exit commercial aircraft while protecting jobs. We’ve done that in a very responsible matter. We are now with two very strong businesses and we are continuing to look at our options to see if we can continue deleveraging.”

The dismembering positions Montreal-based Bombardier to retain only its private-jet division -- while giving it a path to taming a $10 billion debt load. The company’s 7.85% bonds due 2027 climbed 3.8 cents to 103.3 cents on the dollar, yielding 7.3%, according to Trace data. Shares rose 0.6% to C$1.58 in Toronto at 2:39 p.m.

But for all its financial soundness, Bombardier’s exit from its marquee project marks the end of ambitious plans that once were a source of pride in the largely francophone province. The A220 won praise for fuel-efficient engines, composite wings and an airy cabin featuring large windows. But the plane ran more than two years late and about $2 billion over budget, and had trouble attracting buyers in an industry dominated by Airbus and Boeing Co.

And there’s likely more divestitures to come. Alstom and Bombardier could reach an agreement as early as this week, though talks could still be delayed or fall apart, according to people familiar with the matter. Alstom could pay about 7 billion euros ($7.6 billion) for the rail business, Handelsblatt reported earlier, without saying where it got the information. Bombardier is also exploring the sale of its corporate-jet operation to Textron Inc., maker of Cessna planes, the Wall Street Journal reported Feb. 4.

The Montreal-based company sold its turboprop-plane business to Longview Aviation Capital Corp. last year, and has agreements in place to offload its regional-jet operation and a wing plant in Northern Ireland. Those deals are on track to close in the first half of 2020, the company said in a statement Thursday as it reported a loss in line with expectations.

Show Me

Airbus is paying $591 million to Bombardier to raise its stake to 75%. That, combined with the other aerospace divestitures, will bring in more than $1.6 billion in cash and eliminate almost $2 billion in liabilities, according to the statement.

Bombardier is seeking to reduce its debt to about $4 billion by the end of this year, chief financial officer John Di Bert said on the conference call.

With positive free cash flow and the A220 divestiture, there are some positive elements for this “show me” story, Stephen Trent and Brian Roberts, analysts at Citigroup Global Markets, said.

“Assuming that this smaller company now generates cash, it remains to be seen whether Bombardier further monetizes its remaining businesses, a potential positive catalyst – and a $52.1 billion firm order book might be a good place to start the conversation,” the analysts said.

Cash Needs

The deal keeps about 3,300 Airbus jobs in Quebec while boosting the provincial government’s share in the A220 to 25% from 16% for no cash. Economy Minister Pierre Fitzgibbon told reporters the government kept its promise not to add to the $1 billion the previous administration had poured into the plane less than four years ago and is under no obligation to add more money into the program.

Quebec will however, book a charge of about C$600 million ($452 million) from its books to reflect the declining value of its investment and will reassess it yearly until it sells the stake in 2026, a new date that was part of the deal. It hopes to recoup it then.

“Everybody likes the plane, orders are higher than ever,” Fitzgibbon said in an interview. “It’s not being utopian, on the contrary, to believe we’ll get our money back.”

For now though, the A220 faces upcoming cash needs of up to $1.5 billion in the next three to four years, according to the minister. The venture will need to borrow and Airbus will be the sole guarantor if necessary, he said.

Caisse Holding

“We are incredibly proud of the many achievements and tremendous impact Bombardier had on the commercial aviation industry,” Bellemare said in the statement. “We are equally proud of the responsible way in which we have exited commercial aerospace, preserving jobs and reinforcing the aerospace cluster in Quebec and Canada.

Any rail deal will also get Quebec involved as the Caisse de Depot et Placement du Quebec, the province’s influential pension fund manager, owns part of the Berlin-based train business. It spent $1.5 billion in 2016 for the 30% stake. That’s now grown into a 32.5% holding after the unit’s results failed to reach the targets underlying Caisse’s investment, Bombardier said Thursday.

Bombardier reported an adjusted loss of 10 cents. Sales fell 2.3% to $4.21 billion. Analysts had expected $4.23 billion.

--With assistance from Divya Balji.

To contact the reporters on this story: Sandrine Rastello in Montreal at srastello@bloomberg.net;Paula Sambo in Toronto at psambo@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Jacqueline Thorpe

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