Bombardier Inc (TSE:BBD-B): A Strong Takeover Candidate in the Aerospace Sector

Bombardier IncBombardier Inc (TSE:BBD-B) is a prime target for a takeover. It is Canada’s largest industrial group and can be yours for the bargain basement price of CDN$1.56 per share (about USD$1.10/share). One in four airliners flying in North America is a Bombardier. The company also makes a variety of business jets, trains, and buses. Moreover, Bombardier stock is cheap.

The price of Bombardier stock has no rivals anywhere in the world, when compared to similarly sized and capable industrial conglomerates. Clearly, given the evident synergies, Bombardier’s competitors are the likeliest to consider the merger potential, or at least the purchase of major divisions of the company.

Bombardier Already in Talks with Airbus

Airbus, or EADS, (EPA:AIR) was about to pull the trigger on Bombardier, announcing on Wednesday that it has terminated discussions, citing production difficulties with the Canadian company’s new C-Series airliner. The Bombardier C-series is a new 100-150 seat aircraft, depending on the configuration, featuring such innovations as a new kind of jet engine, combining the power of a jet with the quietness and fuel consumption of a turboprop.

Both companies have acknowledged that discussions had taken place. And, according to a source close to the deal, Airbus chose to stop once they have been made public.  As part of Bombardier’s offer, Airbus would have helped the Montreal-based company complete the development of the C-100, its largest-ever airliner, in exchange for a controlling stake in the program.

An alliance or a merger with Airbus would have been good news for the company and certainly more strategic than the suggestion for an unidentified Chinese investor to take a stake in the C-Series, as reported last week. But those discussions ended three or four weeks ago.

This leaves two major options: The Boeing Company (NYSE:BA) and its direct rival, Brazil’s Embraer S.A. (NYSE:ERJ). Boeing is familiar with the company but, as it happens, it would have a problem in a cooperation agreement because of its close relationship with Embraer. However, this leaves the option of an outright takeover within the realm of possibility.

The cooperation and takeover rumors gave Bombardier stock a 15% boost on the Toronto Stock Exchange earlier in the week. However, despite this increase, Bombardier shares are still priced at less than a quarter of their value in July 2008, when Bombardier officially launched the C-Series program.

Some Doubts About Bombardier’s Finances

There are doubts about Bombardier’s financial health, given its $9.0 billion deficit, hence the low valuation. But the C-series alone has so far attracted 243 firm orders for the aircraft against a target of 300 for its 2016 entry into service. It has managed to win any orders at the June show in Bourget.

The C-Series is expected to compete with the Airbus A320 family and Boeing 737, which makes it attractive to all manufacturers. Either one of these global aerospace giants would inherit a fully-developed aircraft, which has exceeded its performance targets at a heavily discounted price.

Ownership of the C-series would also give Airbus or Boeing an advantage in China, which is the world’s fastest-growing airliner market. Indeed, if Chinese investors with huge resources and government backing get involved, it would add considerable competition. An alliance would also allow for synergies in the supply chain.

Meanwhile, Bombardier is structured to allow its divisions to be easily split. The company’s transportation division designs and manufactures rail vehicles, rail control systems, and bogies. Bombardier could sell each of these activities individually or the US$5.0 billion division as a whole, spinning it off or floating it via IPO to focus on the aerospace sector, which has seen considerable growth this year.

There are many potential buyers. In Europe, Siemens, Thales, and Alstom have expressed interest. Given Bombardier’s strong presence and the 2014 merger of Chinese transport giants CNR and CSR Corp, there has indeed been sparked interest in the transport sector.