Bombardier breakup is best prescription for a revival

MONTREAL – A breakup may be Bombardier Inc.’s best option for gaining liftoff.

Shares of the $3.5 billion maker of planes and high-speed trains have slumped almost 40 percent in a year, while rivals such as Boeing and Airbus Group 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 Montreal-based 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 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 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 and Embraer may be drawn to Learjet, according to Macquarie Capital Markets, while Heymann sees France’s Alstom 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 vice president 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 was valued Thursday 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.”

Chief among possible candidates for a sale is the Wichita, Kansas-based Learjet unit, which focuses on small private planes that sell for as much as $14 million apiece. Bombardier said in January it would “pause” development of the all-composite Learjet 85 due to weak demand. Bombardier also cut 1,000 jobs at Learjet and booked a $1.4 billion writedown.

While Beaudoin said on the Feb. 12 conference that there were no plans to sell Learjet, Macquarie’s Konark Gupta in Toronto has estimated the division could bring in $250 million to $750 million. Potential buyers include Textron as well as Brazilian planemaker Embraer, the analyst wrote in a Feb. 26 note to clients.

Bombardier’s larger private-jet models such as Challenger and Global produce more in earnings than Learjet, said David Tyerman, an analyst at Canaccord Genuity in Toronto.

“Of the aircraft assets, Lear is certainly the one that has had the most problems,” Tyerman said in a telephone interview.

Embraer declined to comment Thursday about Learjet. Providence, Rhode Island-based Textron “can’t comment on market rumors,” said Dave Sylvestre, a spokesman.

Selling a minority stake in the Bombardier Transportation train business to Alstom is another possible scenario, according to Gupta and Heymann. The unit has a potential value of $4 billion to $5 billion, Gupta said. Besides high-speed trains, it makes signaling systems, locomotives, tramways and subway cars.

The rail unit has stirred speculation in part because of ex-CEO Beaudoin’s comments last month about participating in industry consolidation. He cited the planned combination of China’s two biggest train makers as a driver for mergers and acquisitions.

Alstom will be in a position to weigh buying a piece of Bombardier Transportation after closing the 12.4 billion euro ($13 billion) sale of most of its energy business to General Electric, said Gupta and William Blair’s Heymann.

“Alstom’s surplus cash and Bombardier’s cash shortfall could be a natural fit,” Gupta said.

Representatives for Alstom, based in Levallois-Perret, France, didn’t immediately respond to an emailed request for comment made Thursday outside of regular business hours.

Smaller deals could include selling Bombardier’s amphibious aircraft business, which has been dwindling in size over the past decade, said Cam Doerksen, an analyst at National Bank Financial in Montreal.

Some analysts say there’s no great urgency for any asset sales after the moves to sell equity and debt this year. The founding family is unlikely to want to pursue a split unless unforeseen issues with the CSeries created a financial hardship, according to Ferguson of Bloomberg Intelligence.

“I think they’d only want to break up the company if they were afraid they were going to lose the company,” he said in a phone interview. “The debt and equity they’ve raised, by our calculation, gets them well into 2016.”

While Bellemare may get the luxury of time in considering possible deals, he probably needs to come up with a strategy within nine months, William Blair’s Heymann said.

“The extra money they raised means they have the flexibility to handle any other unforeseen issues, but Alain has to go to work hard and by year-end have a very clear line of sight,” Heymann said. “There are plenty of options and there’s no gun to anybody’s head.”