Bombardier's Government "Bailout" Hurting Shareholders

4 nov 2015

Preface

It comes to no surprise that once again the Canadian "too big to fail" manufacturing giant, Bombardier, is suffering against competition due to a low inventory turnover ratio and a CSeries line of Jets that just isn't selling. In their last quarterly report Bombardier made no recognition in the notes to the financial statements of the fact that they were behind on production. A quick inventory turnover ratio analysis suggests otherwise but the highlight this week is the failing CSeries Jets and the Quebec government's so called "Bailout" strategy for the program.


Breakdown

- The Quebec government invested US$1 billion (CA$1.3) for 49.5% of Bombardier's CSeries and 200m warrants for BBD.B.

- The government is not in for the money, but to solve a confidence crisis. The CSeries is not expected to deliver free cash flow until 2020.

- Bombardier's CSeries is in a Catch-22. The CSeries program can't survive without orders, and there's won’t be orders unless the CSeries program survives.

The Bailout

Bombardier Inc. is primarily traded on the Toronto Stock Exchange under the tickers BBD.B and BBD.A. Class A has ten votes per share, and Class B has one vote per share. The Beaudoin-Bombardier family has 54.35% of all the voting rights. BBD.B is the most commonly traded ticker.Investissement Québec, the government's investment arm, announced a partnership with Bombardier that would regroup the asset liabilities of the CSeries project. For US$1 billion (CA1.3b) and warrants to purchase 200 million shares of BBD.B for $2.21 each, Investissement Québec will own 49.5% of the partnership. The exercise price of the warrants is 58% higher than the current stock price of $1.40, and if exercised, it would make the government the largest owner of Class B shares. In exchange, BBD promised to keep its headquarters in Quebec for the next twenty years and CSeries-related activities. BBD will get US500m on April 1, 2016 and another US500m on June 30, 2016. By the way, it's noteworthy to mention that this is not the company's first instance of governmental aid. Different levels of government have backed Bombardier time and again over the decades.

How Does This Hurt Shareholders

Governmental aid has proven in the past to ruin the overall trust and reputation of share prices persuading investors to think of Bombardier as a unstructured company using taxpayer funds to operate. Shareholders equity margins have decreased substantially over the past couple of months highlighting that Bombardier's return on equity as under performing. By simply reading the Management Discussion section in their annual report investors greatly shy away causing bearish runs and short lived positive divergences. Lastly the 200M warrants held by the Government discourage future investors from going "Long" on the Class B shares (BBD-B.TO) with fear of the warrants being exercised beore expiry and possibly hurting the share price.