When Bombardier Inc. first announced last month it might sell its transportation unit to focus on business jets, analysts knocked the strategy, arguing it would leave the company totally exposed to the highly cyclical aerospace industry.
There is dependable demand for Bombardier trains, argued the financial types. In contrast, is there anything more unpredictable than a billionaire’s appetite for the flying palace that is a new Learjet, Challenger or Global-branded luxury aircraft? Why sell trains to keep planes?
Anyone who follows family-controlled Bombardier’s history has heard this sort of criticism before. And they know the analysts can be dead wrong, while the heirs to the Montreal-based company’s founder, the Beaudoin clan, have got these calls right in the past (although not always - the massive cost overruns on the commercial C Series airliner being a notable example). However, Bombardier’s decision to sell its transport division to France’s Alstom on Monday for US$8.2-billion and focus on the aviation business is in keeping a recipe that has worked for the company in the past.
Back in 2003, the Street was giving Bombardier grief over the capital and management time devoted to what seemed like the ultimate in discretionary products: Ski-Doos and Sea-Doos. In response, the Beaudoin family, which controls Bombardier through a dual share structure, spun out the recreational vehicle division and its supposedly cyclical results to focus on just two divisions, trains and planes.
Getting rid of Ski-Doos is sort of the sensible strategy taught in Harvard Business School. Can’t you hear a professor explaining dabbling in luxury goods is to be avoided, while an enterprise that generates dependable cash flow from a single business, such as making trains, is to be embraced?
How did the Ski-Doo spin work out? Well, the Beaudoin clan and private equity firm Bain Capital bought the division for $1.23-billion 17 years ago. They rolled out new product lines, including three-wheeled motorbikes called Spyders, and shifted manufacturing to Mexico. In 2013, the recreational vehicle maker went public as BRP Inc.
While the stock price bounced around over the past seven years, reflecting shifts in consumer spending, BRP shares are up threefold since the initial public offering, making this a huge win for investors. BRP now sports a market capitalization of $6.7-billion; the company is 50 per cent more valuable than Bombardier. Which tells you the Beaudoin offspring, and the managers they hire, know something about selling expensive toys to wealthy customers.
Can Bombardier chief executive Alain Bellemare replicate the success of BRP? That’s certainly the goal. Mr. Bellemare is an aerospace veteran. He was hired in 2015 to oversee a turnaround. The job featured two major challenges: Paying down debt that ran to more than US$9-billion and focusing Bombardier on what it does best. Both problems may have finally been solved by the Alstom deal.
Going forward, Bombardier will be a business jet maker with an industry-leading US$14.4-billion backlog of orders. The company will introduce new products, in the form of larger planes with greater range. Mr. Bellemare will expand a servicing business that kicks off dependable cash flow by keeping a fleet of more than 4,800 existing Bombardier jets in the air.
Alstom, on the other hand, will shoulder responsibility for fixing a trains business that has been plagued by cost overruns and missed deadlines in recent years. The headaches that come with dealing with a Bombardier factory in Thunder Bay that laid off 550 employees in November – half its work force – are now a Paris-based CEO’s problem.
The path forward won’t be easy. Mr. Bellemare may need to do one more significant deal to pay down more of Bombardier’s US$2.5-billion remaining debt, such as landing in an investment from a private equity fund. He must deal with competitors such as Gulfstream and Cessna that are part of larger aerospace conglomerates. When the next economic downturn comes, as it surely will, Bombardier’s faith in demand for corporate jets will be tested.
However, on Monday, Mr. Bellemare finally shed the bulk of the debt left over from the company’s ill-fated foray into commercial aircraft manufacturing. The Alstom deal signals that five years after he arrived, Mr. Bellemare has determined that going forward, this company makes business jets, and that’s it. For Bombardier, the runway is finally clear.