Bombardier Inc. got a nice little bump in its share price this week on news of a possible combination between Britain's BAE Systems and EADS, owner of Airbus, to create an aerospace-defence giant. Many believe this will kick off consolidation in the sector. If so, where does that leave Bombardier?
Don't get too excited, because the answer is likely to be on the sidelines.
First, given the Montreal company's relatively small size and strained balance sheet, it would be considered a seller, not a buyer – and the Beaudoin/Bombardier family that controls it has shown no interest in selling. The federal and Quebec governments would also have something to say about the loss of a homegrown champion.
Second, a BAE-EADS deal is primarily about consolidation in a flat defence spending market. Bombardier makes passenger trains and planes; its foray into defence was marginal and short-lived, and it sold its stake in a missile joint venture in 2000.
The next issue is that different parts of Bombardier would interest very different buyers, which means it would have to be broken up to sell. The business jet division, which makes high-end Challenger and Global private jets, would have no shortage of suitors, including defence giants looking to balance out their business. Lockheed Martin might be one, given that it lacks a business jet division, unlike rivals Textron (Cessna) and General Dynamics (Gulfstream). But the business jet market is tepid, so it makes little sense to sell now when valuations are depressed.
Meanwhile, Bombardier's commercial airliner business isn't worth much these days – all of 69 cents a share, under a best-case scenario, according to a recent report by Byron Capital Markets analyst Tom Astle. Demand for its regional jets and turboprops remains soft, and the company is betting heavily on its new transcontinental C Series jet, but there would be little actual value for any potential buyer given the project is still in development.
The business has been a weak profit contributor and a strain on the balance sheet, but it could attract buyers such as EADS and China's state-owned jet maker COMAC. However, the price wouldn't be very compelling, and it's hard to imagine the Beaudoin/Bombardier family taking a fairly small cheque now, given its belief in the C Series.
Consolidation may take off in the sector. If it does, expect Bombardier to miss the flight.