Bombardier Inc. (TSE:BBD.B) shares surged 16% on the announcement that Airbus will acquire a 50.01% interest in the C Series program
SmallCapPower | October 17, 2017: Bombardier Inc. (TSX:BBD.B) rose nearly 16% Tuesday, the biggest one-day gain since March 2016, after the Company announced that it would sell a majority stake in its C series program to Airbus SE (EPA: AIR). As part of this, Bombardier inked an agreement with Airbus to establish C Series Aircraft Limited Partnership (CSALP), which will manufacture and sell the C Series. Airbus will acquire a 50.01% interest in CSALP and will provide procurement, sales and marketing, and customer support expertise to the entity. Although the CSALP’s headquarters and primary assembly line will remain in Québec, an additional C Series production will be established at Airbus’ manufacturing site in Alabama, U.S.
The deal with Airbus will help Bombardier secure the future of C Series that has been plagued by numerous issues including the recent dispute with Boeing that could result in 300% duty on U.S. imports. As the final assembly of the jets for U.S. customers will be done at Airbus’s plant in Alabama, Bombardier believes it could avoid the import duties from the U.S. Commerce department on C Series. However Boeing said in a statement that the announced deal has no effect on the pending proceedings and that any duties finally levied against the C-Series will have to be paid on any imported C-Series airplane or part.
In addition to helping fight Boeing, the deal could boost Bombardier’s C Series jet sales in Asia where Airbus has strong market presence. Although relinquishing the C Series program after spending billions of dollars shows Bombardier in the bad light, it highlights the transition away from commercial aviation towards higher-margin executive jets. The valuation for the C series, which is currently estimated at $2.0 billion, could double post the Airbus deal that is expected to be complete late next year, Bombardier’s Chief Financial Officer John Di Bert said in a conference call Monday night. Although no upfront cash is being paid by Airbus for its majority stake, it will have the right to buy out the partners after 7.5 years, which Airbus says it will most likely execute.
Bombardier stock currently trades at a low price to TTM sales of 0.38x. Since the Company generates low operating margins of 1.3% (TTM), an appropriate valuation metric would be EV/EBITDA, which Bombardier trades at 30.25x.
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