The deal marks a step away from what had been touted as the crown jewel of Canada’s biggest aerospace company before it was tarnished by cost-overruns and trade disputes. With this deal, the company is likely to sharpen its focus on private jets and trains — two businesses with higher margins.
“This is Bombardier opening the door to the transition away from commercial aviation,’’ Karl Moore, a professor of management strategy at Montreal’s McGill University, said in a telephone interview. “I’m not sure they had much of a choice. Surely they will have interesting opportunities in executive jets and trains, and they can reinvest in those.’’
Private business jets have been Bombardier’s most profitable division, while commercial aircraft — weighed down by losses tied to the development of the C Series — ranked among the company’s worst-performing. Bombardier’s commercial unit includes older products such as the CRJ regional jet and the Q400 turboprop.
The C Series is Bombardier’s biggest and most expensive commercial jet program, often billed by the company as a “game-changing’’ aircraft with superior economics and fuel efficiency. The deal with Airbus gives the European planemaker majority control with a 50.01 percent stake. Bombardier will retain about 31 percent, and the Quebec government will hold 19 percent.
Regional commercial jets contributed the bulk of Bombardier’s revenue during the 1990s, but orders eroded over the last decade as Brazilian rival Embraer SA captured market share with newer models. Sales have also slowed for turboprops as European rival ATR — partly owned by Airbus — offered cheaper and lighter products.
As business has lagged in commercial aviation, trains and business jets promise growth. Deliveries of luxury jets are forecast to rebound in 2018, and with Bombardier about a year away from starting shipments of its biggest-ever private plane, the Global 7000, prospects in that segment are rising, said Cam Doerksen, a National Bank Financial analyst in Montreal.
“The business jet market is at a cyclical low with deliveries, and Bombardier has a brand new aircraft coming to market in a year,’’ he said. “This constitutes upside for the stock.”
Bombardier’s train segment is also poised for improvement. The manufacturing unit has been hobbled by well-publicized delays on major projects such as streetcar deliveries to Toronto. The company is now working to improve profits, in part through cost-cuts and more factory specialization. The train business bore the brunt of a company plan — announced a year ago — to eliminate 7,500 jobs globally.
Bombardier also remains open to rail partnerships after missing out on a combination with Germany’s Siemens AG, which picked Alstom SA as its partner.
“We will continue to explore opportunities on the train side,’’ Bombardier Chief Executive Officer Alain Bellemare said late Monday on a conference call with analysts, after the announcement of the Airbus agreement.
“Rail is a core business for them,’’ said Doerksen, who sees opportunities for deals “at some point. In the meantime they will continue to work on margins.’’
Whether commercial jets also remain a core business is yet to be seen, he says. Regardless, Bombardier’s joint venture with Airbus allows the company to extract more value from its C Series jets by capitalizing on the marketing muscle and supply chain economics Airbus will bring.
The move prompted Doerksen on Tuesday to raise his 12-month target price on Bombardier stock to C$3.50 a share from C$3. The company’s widely traded Class B stock jumped 15 percent to C$2.73 in Toronto trading Tuesday, the biggest one-day increase since March 2016.
Airbus’s involvement could more than double the value of the C Series program after the deal closes late next year, Chief Financial Officer John Di Bert said late Monday in the same conference call with analysts. The company currently values the business at $2 billion.
Airbus is paying no upfront cash for its majority stake, and will have the right to buy out its partners after 7.5 years — an option the Toulouse, France-based company said it will probably exercise.
“Yes, Airbus is getting a great deal here, but the value for Bombardier could be much higher than if they continued to go it alone,’’ said Doerksen. “People viewed the C Series as an ongoing cash burn. This removes all of that uncertainty.’’
The jet program played a major role in recent years in saddling Bombardier with almost $9 billion of debt. The C Series entered service in July 2016, two and a half years late and more than $2 billion over budget. Bombardier’s most recent figure put the development cost at about $6 billion.
The deal with Airbus “does some good things for Bombardier,’’ said Chris Murray, an AltaCorp Capital analyst in Toronto. “Net net, you are trading a majority stake in a $2 billion pie for 31 percent of a $4 billion pie, and you have de-risked the company.’’
©2017 Bloomberg L.P.