Bombardier made a Hail Mary pass when it asked Airbus to take control of its C Series aircraft program. It was a desperate, long-shot move from a desperate company, and it didn't work. Airbus said non, merci, leaving Bombardier flapping its wings on the runway. Maybe Airbus and arch-rival Boeing are waiting for Bombardier to kill the C Series, all the better to eliminate a competitor who had the audacity to try to muscle in on their passenger jet duopoly.
The failure of the C Series jet, even Bombardier itself, is no longer unthinkable. Quebec's favourite corporate son and Canada's premier technology company is running out of options in a hurry. The C Series is two years late, $2-billion (U.S.) over budget and hasn't booked a firm order in more than a year. The shares are down 57 per cent in the past year and the company lost money in 2014. Liquidity, while still ample at $3.1-billion at the end of June, is vanishing at an alarming rate. Given the C Series waning fortunes, Bombardier's $9-billion debt pile is way too big.
No wonder the company offered Airbus a controlling stake in the C Series. It was the equivalent of destitute parents wanting to give up a newborn child they can't afford to feed.
How to save Bombardier from BlackBerry status? Bombardier is doing all the things you would expect it to do except one – dismantling its dual-class share structure. The structure keeps the Beaudoin-Bombardier family in firm control at the sake of repelling investors of both the passive and strategic variety. If there were ever a time to scrap the supervoting shares, it is now.
The big, fat A shares come with 10 votes apiece. The subordinate B shares come with one. The former are 54-per-cent owned by the Beaudoin-Bombardier family members, meaning that in any corporate decision, they are the law. In a normal company, Pierre Beaudoin, who was CEO from 2008 until last February, would have been marched out of the building for overseeing a rather nasty bout of value destruction. But he's still around, not just as chairman, but as executive chairman, thanks to the family's voting and boardroom power.
The voting structure has never been popular with Bombardier's non-family professional managers. More than a decade ago, Paul Tellier, the former CN Rail boss who was recruited by the family to clean up the rail portfolio and figure out how to make planes such as the Q400 turboprop profitable, had fantasies about abolishing the dual-class share structure. He also thought that taking on Airbus and Boeing with the launch of the C Series would be a kamikaze run, but that's another story.
Mr. Tellier didn't last long. The Beaudoins colonized the CEO's office and the corporate governance and share structure remained the same. If the C Series had been a flyaway hit, the dual-share setup might not have been a big issue. But the plane, designed to compete with Boeing and Airbus's smallest models, has been a slow seller and Bombardier is in trouble.
To shore up the balance sheet as the cash burn intensifies, Bombardier is rolling back corporate jet programs and giving a chunk of its enormous train division in Europe the IPO treatment. That's all fine and good, but what it really needs is recognition from the Beaudoin-Bombardier family that it needs to give up control of the company.
Institutional investors have no love for Bombardier because of the supervoting shares. In February, the mighty Caisse de dépôt et placement du Québec said as much when it bought only a small number of the nearly 500 million new subordinated shares that raised $1.1-billion (Canadian) for Bombardier. The Caisse would have been the lead investor had the family accepted the Caisse's demand that the A shares' weighting be reduced by four votes to six. The dilution would have dropped the family control to less than 50 per cent.
Had the Caisse deal gone through, institutional confidence in Bombardier would have climbed, giving them assurance that the new CEO, Alain Bellemare, or any other gun-for-hire wouldn't see his decisions drown in the family gene pool. It also would have made Bombardier a target for hedge funds or shareholder activists, who would have demanded a shakeup and new plans to restore value. It might have attracted a strategic investor who could fund the C Series' development and marketing program. We don't know whether Airbus took a pass on the C Series because it hopes the plane will die or simply because it was put off by the family's domination of the company.
Of course, giving up family control would expose Bombardier to a potential takeover, one that could see the company dismantled or turned into a branch plant. Or maybe not. Given Bombardier's importance to the Quebec economy and Montreal's ego, any takeover or investment could be structured to local preserve jobs and manufacturing.
When Bombardier decided to develop the C Series, it bet the family ranch. It's betting the ranch again by apparently leaving family control sacrosanct. The family's bargaining power is nowhere near as strong as it thinks. Something has to give and the share structure is the logical place to start.
Eric Reguly