Long-term shareholders of Bombardier (TSX:BBD.B) have had had little to cheer about. One of Canada’s most polarizing stocks that’s been fraught with mismanagement has been one of the worst investments on the index.
Over the past 10 years, the company’s stock price has more than halved (-70%) and despite a slight bump in 2018, Bombardier has been dead money. Over the past year, the company’s stock has touched all-time lows and has lost 34% of its value.
Over the past two weeks, Bombardier has announced two major deals that will completely transform the company.
Exit from commercial aviation
Last week, the company announced that it was exiting the commercial aviation space. The company sold its stake in the A220 program for $591 million to Airbus — a deal that effectively ends what was once a promising endeavour known as the C-Series.
Fraught with delays, Airbus bailed out Bombardier by becoming a partner in the program back in 2018. It was a lifeline that was desperately needed, and the planes were rebranded as the A220 commercial jet.
The deal was largely viewed as a positive one by the markets, as it will help the company improve its capital structure by injecting cash and releasing Bombardier from its future funding capital requirement to Airbus Canada.
Exit from the railway business
This week, the company announced that it was exiting the railway business as it announced plans to sell the Transportation Division to Alstom for $8.2 billion. Striping out liabilities, the company is expected to net proceeds in the $4.2 to $4.5 billion range.
Once again, the move will significantly improve the capital structure of the company. Combined with the A220 deal and other divestitures still pending, the company will “…have between $6.5 and $7.0 billion of pro forma cash on hand, putting the company on a brand-new footing to address its $9.3 billion of debt.”
As of writing, it is not yet known how the market will react however it does significantly address the company’s high debt profile. Unfortunately, it is yet another example of failed management. The rail business was struggling to meet deadlines and made headlines for all the wrong reasons.
There was a highly publicized dispute with Swiss Federal Railways in which it claimed that the trains failed to meet expectations. There were several issues with the trains after a lengthy delay in initial delivery.
This past January, Bombardier made headlines once again as New York City pulled 300 newly delivered Bombardier subway cars from its tracks. Recent incidents led the company to state, ““As documented, the Metropolitan Transportation Authority has identified repeated issues with Bombardier’s performance and finds this latest development unacceptable. We intend to hold the company fully accountable.”
The company proved inept at meeting deadlines and delivering quality products.
Once the Alstrom deal closes, Bombardier becomes a small business jet pure play which the company values at $7.0 billion dollars — a unit that has a market-leading $14.4 billion backlog.
The good news is that this is what Bombardier does best. Upon deleveraging, it’s expected to have approximately $2.5 billion in debt on the books, which is a far more manageable amount.
Although the more focused approach should be a welcomed sign, $2.5 billion owed on a $7.0 billion business is still a considerable amount. Similarly, the company will still have approximately $1 billion in under-funded pension plan obligations.
Finally, as a company with a single line of business, it’s now exposed to the highly cyclical nature of the aerospace industry. Although demand is healthy today, can Bombardier survive a downward cycle?
Only time will tell, but disposing of the much maligned commercial aircraft and the problematic railway segments is a step in the right direction.
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