Bombardier, Quebec finalize $1-billion C Series stake

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Quebec has struck a definitive deal with Bombardier Inc. to make a $1-billion (U.S.) investment in the plane maker's C Series airliner program as the province holds out hope that the federal government will jump in as a third partner in the fledgling business.

But with Quebec saying Ottawa won't receive more favourable terms than those it signed with Bombardier if it buys into the C Series as an investor, the hurdles to a three-way agreement appear high. Discussions between Bombardier and the Canadian government have now lasted more than seven months and sources say no pact is imminent as the urgency of the company's $1-billion aid request to Ottawa subsides.

"It's one thing to rescue a troubled company" like Quebec did last fall when Bombardier's liquidity was in question, said Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Va. "It's another thing to give another $1-billion to a company that's doing really well on world aviation markets. That goes from rescue to some form of predation [against other countries]."

Quebec stepped in with a $1-billion pledge to backstop Bombardier's C Series program last October. The intervention came at a critical time, reassuring investors anxious about the company's cash situation and comforting prospective customers that the manufacturer would be there to build out and support its aircraft.

For the province, it was an easy decision to protect a strategic company that represents 2 per cent of its GDP. And the result was clear: Bombardier won a game-changing order from Delta Air Lines for up to 125 C Series aircraft that paves the way for more orders in the months to come. The carrier's chief executive said Quebec's support was instrumental in his company's decision to purchase the planes.

A final agreement between Quebec and Bombardier was delayed as officials made sure the deal did not break international trade rules and while the province waited to see whether Ottawa would also invest, Quebec Transport Minister Jacques Daoust said Thursday. The Canadian government's involvement remains unclear but Quebec decided it had to move forward, he said.

"There comes a point in time when you've got to finish [what you started]," Mr. Daoust said in an interview. "The most important thing was that we end up with a deal that was not a subsidy transaction but a commercial transaction."

Bill Morneau, the federal Finance Minister, confirmed Thursday that Ottawa continues to "engage with Bombardier" in talks, adding that the government considers the aerospace sector "very important" to Canada and a key hub for innovation. He declined to provide any characterization of how discussions are progressing.

Federal officials have expressed reservations about Bombardier's dual class share system, which gives its founding Bombardier-Beaudoin family control over the company through supervoting stock. Sources say that remains a key point of contention in the investment talks as each side tests the limits of the other.

The two sides are also at odds over the structure of a deal. Ottawa favours a financing for the parent company while Bombardier prefers a direct equity participation in the C Series program like the one Quebec made, sources say.

With $5.5-billion in available resources, Bombardier has "good liquidity" through 2018 and probably won't need to access the capital or bank markets until the end of that year, Moody's Investors Service said in a note Thursday that stabilized the plane maker's ratings outlook while downgrading its senior unsecured bonds.

An investment by Ottawa would "extend the liquidity cushion beyond 2018," Moody's said. It could also provide Bombardier with increased financial flexibility to pursue other development opportunities such as a larger C Series model, RBC Capital Markets analyst Walter Spracklin said.

"It's still highly desirable that the federal government is part of this," Mr. Daoust said. "It's not essential but it's highly desirable. ... For the solidity of the company, it would be good that the federal government invest."

He insisted that should the federal government make an equity investment in the C Series, it won't win any advantages Quebec doesn't already have. "They won't have a better treatment than us," the minister said, saying the deal can accommodate another partner but under the same terms already negotiated. "We'll have equal treatment together."

Under the deal with Quebec, Bombardier will control a newly created C Series limited partnership with a 50.5-per-cent stake while the province owns 49.5 per cent. The partners will have naming rights to three directors and two directors of a five-member board respectively. Former Quebec Premier Daniel Johnson will serve as chairman.

Quebec is expected to make a first $500-million payment to Bombardier on June 30 with a second payment coming Sept. 1.

Details of the agreement are largely the same as the memorandum of understanding previously announced with one major difference: Quebec is taking 100 million stock warrants in Bombardier Inc., half the amount originally contemplated.

Mr. Daoust said the dilution of Bombardier stock was a concern in making that decision and that the province won other tradeoffs instead including unspecified changes to the conditions under which Bombardier can buy back the province's joint venture ownership position. Warrants for 100 million shares represents about 4.3 per cent of the company's issued and outstanding stock.

"We'll exercise the warrants when we're in the money," Mr. Daoust said, noting it would not be easy to put that volume of shares on the market without a negative effect on the stock price. "There's no urgency to do that. For now, it's one of the goodies we have on the side."

Completion of the Quebec deal is an "important step" in securing the money needed to ramp up C Series production over the next several years, BMO Capital Markets analyst Fadi Chamoun said in a research note. "The agreement should also provide a confidence boost in the program and support the company's marketing efforts."

The C Series is Bombardier's big bet to drive revenue growth in its commercial aircraft division over the next generation. The plane is the first clean-sheet design of a single-aisle airliner in nearly 30 years and competes against the smallest planes made by Airbus and Boeing Co. Two years late to market and $2-billion over budget, the plane is scheduled to enter commercial service next month with Deutsche Lufthansa AG's carrier Swiss.

Bombardier shares have gained about 48 per cent since the start of 2016.

With files from David Parkinson