Bombardier Inc. (BBD.TO) may have to consider selling one – or potentially all – of its existing assets, some analysts say, as the beleaguered company looks to accelerate payment of its significant debt load.
The Quebec-based company’s stock tanked on Thursday, closing the day down 32 per cent at $1.22, after it revealed its financial targets would once again fall below original expectations, largely due to ongoing challenges at its transportation division.
Bombardier also said Thursday that it is considering an early exit from its joint venture partnership with Airbus and the Quebec government, which will require additional cash investment to support the ramp-up of production of the A220 jet. The plane and train maker suggested it will take a write-down on the business, which is now expected to generate a lower return over the life of the program.
Despite the barrage of bad news, chief executive Alain Bellemare said in a statement Thursday that the company is on a “solid path toward organic growth and margin expansion.”
“We are actively pursuing alternatives that would allow us to accelerate our debt paydown,” Bellemare said.
“The objective is to position the business for long-term success with greater operating and financial flexibility.”
How the company plans to accelerate the payment of its long-term debt, which analysts say is at more than $9 billion, remains to be seen. Given Bombardier has sold off numerous assets over the last several years, including most of its commercial aviation programs, it appears to have limited options.
National Bank Financial analyst Cameron Doerksen said in a note to clients Thursday that he does not expect the company to seek an equity issue, “which would be massively dilutive to existing shareholders”, or an equity-for-debt swap.
“Rather, we speculate that that company may be looking at strategic alternatives that could include the sale of one of its two remaining divisions,” Doerksen wrote.
“If that is the case, the most obvious candidate in our view would be its Aviation business.”
Doerksen said that Bombardier’s aviation division – which consists of its business jet program – is “a solid business with a refreshed lineup, decent margins and a good backlog” that could potentially be worth $6.6 billion. That would leave Bombardier with just its transportation business, its most profitable segment.
JP Morgan analyst Seth Seifman wrote in a note to clients that the strong language used by Bombardier in the news release Thursday suggests some urgency and “the potential to pursue strategic options, including a breakup and sale of all or part of the company.”
“Raising capital through asset sales is the only alternative we can think of and, for this to be meaningful, it may include one or both of Bombardier’s two major businesses: (business jets) and trains,” he wrote.
“The Beaudoin-Bombardier family’s views are a key variable in how this situation will evolve.”
RBC Capital Markets analyst Walter Spracklin lowered the company’s price target from $3.00 to $2.00 on Thursday, saying that what the company considers when it comes to “strategic alternatives” will be the key “wildcard” for Bombardier’s stock performance.
Bombardier has been exiting the commercial aerospace segment over the last several years, selling off several key assets as it searches for sustainable growth and profitability. It has sold off the Q400 and CRJ programs, as well as its aerostructures business.
Bombardier handed control of the struggling CSeries program to Airbus in October 2017. Its current 30 per cent stake in the Airbus joint venture is its only remaining commercial aviation business, although the company is now reassessing its participation. Spracklin said Bombardier management indicated that the cash injection required to support the A220 production ramp-up is in the range of “several hundred million.”
This is the second time in the last six months that Bombardier has adjusted its financial targets because of rising costs tied to several key rail projects. In August, the company announced it will invest between $250 million and $300 million into its transportation division to ensure late-stage rail projects are completed and delivery schedules are met.
The company is in the final stages of Bellemare’s five-year turnaround plan that began in 2015.