Trudeau waiting for Bombardier’s controlling owners to blink

Share

For months, Justin Trudeau's government has been locked in a staring contest with Bombardier Inc. Now the Liberals have a little more time to wait for the company's controlling family to blink.

Bombardier, the Montreal-based planes-and-trains maker, wants $1-billion in public money. But the government doesn't like the idea that the Beaudoin-Bombardier family will keep the majority control that it retains through multi-vote shares.

There's been a lot of pressure on Mr. Trudeau's government to cough up. Quebec Premier Philippe Couillard noted the feds put money into the Ontario-based auto industry when it needed a bailout. Now, he argued, federal money should stabilize Bombardier's bet on the commercial-aircraft business, the C Series, and help protect jobs in Quebec's aerospace industry.

Mr. Couillard redoubled the pressure after Bombardier received a big order from Delta Air Lines for at least 75 planes, suggesting it shows the C Series is a viable hope for Quebec industry. But that deal actually gave Mr. Trudeau's government some time – he has to worry about the political fallout of a failure, but that's not as imminent a danger now. Ottawa now has some breathing room to wait out its demands.

So far it's a standoff. Bombardier's executive chair, Pierre Beaudoin, said Friday his family won't give up control, arguing it provides long-term stability. Mr. Trudeau said the negotiations are still on, but behind the scenes Ottawa has pressed its objections.

The biggest sticking point is this: The company wants public money and for its riskiest business line, but the Beaudoin-Bombardier family refuses to give up its control. The family that made the missteps on the C Series gets to stay in charge, while ordinary shareholders are clobbered and taxpayers bear risk. Under those terms, Ottawa's $1-billion would buy a double dose of moral hazard.

There is always moral hazard – the economics term for the dangers of allowing someone to take on risk while others bear the cost – whenever a government intervenes to aid a struggling private company, such as when Washington bailed out the too-big-to-fail financial institutions in the 2008 financial crisis. Saving firms from the consequences of their own risky behaviour encourages them, at least in theory, to take bad risks. Bombardier, which has over the years repeatedly sought government financing, seems to be an example.

In this case, Bombardier wants Ottawa to buy into its new C Series division; Quebec has already agreed to buy 49.5 per cent for roughly the same sum. It would spin off Bombardier's riskiest venture to a publicly backed division.

The double dose of moral hazard comes from leaving the controlling family untouched. The Beaudoin-Bombardier family controls 53 per cent of voting rights through a class of multi-vote shares, which get 10 votes. They bet the firm on a risky venture into commercial aircraft – bigger passenger planes than their regional jets – and ran into trouble with cost overruns, delays and debt. Share values took a beating. But the family gets to keep control. And this past year, Pierre Beaudoin shared half a $10-million compensation package with CEO Alain Bellemare.

It's no wonder the Liberal government is squeamish. It's not the money alone – it's $1-billion for a government running a $30-billion deficit. There are also regional jealousies – the Conservatives would accuse the Liberals of bailing out Bombardier before they approved an oil pipeline. But both are exacerbated if Ottawa's $1-billion investment allows the family to keep its comfortable control – especially if the investment sours.

But there's another regional split, too. In English Canada, on Bay Street and among pundits, Bombardier and its controlling family are viewed as a serial corporate-welfare bum. Mr. Trudeau's Toronto-centric inner circle tends to share that view. In Quebec, Bombardier is seen as a business champion, a critical "good-job" employer, and when Mr. Couillard calls for Ottawa to step in, most agree. That's makes it an ugly political squeeze.

But last week's Delta order gave Mr. Trudeau's government time. The C Series isn't yet profitable, but there are orders. The company isn't facing an emergency. Mr. Trudeau's government can wait on its demand that the family loosen its control, if not by completely revamping the share structure, then perhaps by selling some multi-vote shares. If he has the stomach, Mr. Trudeau can wait to see if the family blinks.