Buffett Courtship Gives Bombardier Stock Boost
Almost as soon as Berkshire Hathaway Inc. (BRK/A)’s NetJets bought big private planes in March 2011, talks got under way that led to the June 11 deal for as many as 275 smaller jets, said Steve Ridolfi, president of Bombardier’s business-aircraft unit.
The result was a record order for Montreal-based Bombardier, valued at $7.3 billion. While Textron Inc. (TXT)’s Cessna got the rest of a deal worth $9.6 billion at list prices, Bombardier enjoyed a second boost from NetJets in 15 months amid an industrywide slump in luxury aviation.
“This was a yearlong campaign,” Ridolfi said yesterday in a telephone interview. “After we concluded the large-segment transaction, they told us they would be looking at the medium- sized marketplace. We worked really hard to define a configuration for them, they liked what we did with our product strategy, and that carried over to cementing a close-knit relationship between our management teams.”
Business aircraft are the biggest product segment within Bombardier’s aerospace unit. They accounted for $643 million, or 43 percent of first-quarter aerospace revenue, almost four times the $168 million generated by sales of commercial planes such as the CRJ regional jets.
With 46 percent of all 2011 revenue from Europe, Bombardier also is the Canadian industrial company most dependent for sales in a region now racked by a sovereign debt crisis, according to data compiled by Bloomberg.
“NetJets can be a very secure client for Bombardier,” said Denis Durand, a partner at Montreal-based Jarislowsky Fraser Ltd., which has about $38 billion in assets under management. NetJets is “the biggest player in the industry, it’s well-funded and it has a multitude of customers, so it isn’t dependent on the financial health of a single client.”
Bombardier’s Class B shares rose 0.9 percent to C$3.88 at the close in Toronto, extending the 6 percent gain yesterday that marked the biggest advance since May 10. The company’s 5.75 percent U.S. dollar-denominated notes due March 2022 rose 0.8 cent on the dollar to 99 cents yesterday, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority.
Industrywide private-jet deliveries plunged 29 percent in value from a 2008 peak through 2011, market researcher Teal Group said in an April report. Teal predicted an increase of 6 percent this year, followed by an 8 percent advance in 2013.
Winning the NetJets business will go a long way to assuage investor concern over Bombardier’s free cash flow and order book for small- and medium-sized business jets, said Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal.
Bombardier’s portion of the order, for two models of Challenger jets, is equal to about four years of production for that family of planes, said Walter Spracklin, an analyst with RBC Capital Markets in Toronto. Deliveries to NetJets are scheduled to begin in 2014, Bombardier said June 11.
While analysts including National Bank Financial’s Cameron Doerksen in Montreal said the deal may spur Bombardier to boost business-jet output, Ridolfi declined to comment on the likelihood of a production increase.
At the end of March, Bombardier had a 10-month backlog for Challenger jets, less than the target of 15 to 18 months, according to a May 10 filing. Last year, the planemaker delivered 86 aircraft, including 37 of its 300 model and 43 of the 605s, said Danielle Boudreau, a spokeswoman.
“This gives Bombardier visibility into their production rates across a number of models, looking ahead a number of years,” Doerksen said in a telephone interview. “They are going to make consistent deliveries over several years. It’s clearly an endorsement of Bombardier’s aircraft by NetJets.”
NetJets’ order still wasn’t enough to improve investors’ perception of Bombardier’s creditworthiness.
The cost to protect against losses on Bombardier bonds for five years with credit-default swaps rose 1.3 percent to 425 basis points yesterday, according to data provider CMA in New York. That left the price near the highest level since late January, CMA data show.
Credit-default swaps, which typically cost more as investor confidence deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Business-aircraft deliveries may total about 180 this year, Bombardier has said. That would be in line with 2011, when shipments grew 21 percent from 150 the year before, according to data from the General Aviation Manufacturers Association.
Bombardier’s competition for the deal was Brazil’s Embraer SA (EMBR3), Desjardins Capital’s Poirier wrote. Embraer landed a NetJets order first, selling as many as 125 planes in October 2010. NetJets hasn’t identified other bidders.
Also included in this week’s NetJets order is an aftermarket support agreement that Bombardier said has a value of as much as $2.3 billion if all aircraft options are exercised.
“The long-term services and support agreement is a significant win both strategically and financially,” Chris Murray, an analyst at PI Financial Corp. in Toronto, said in a note to customers yesterday. “Typically service activities offer higher margins than manufacturing.”
Even with the discounts typical in fleet sales, the NetJets order may be “highly profitable” because of the uniform nature of the jets’ interiors, which are being completed by Bombardier, and the “high-margin” aftermarket service business, according to Scott Rattee, a Stonecap Securities Inc. analyst in Toronto.
Ridolfi would only say that Bombardier was “aggressive, as we are in going after all business,” and declined further comment on pricing.
If Ridolfi has his way, the NetJets deal will herald other purchases by business-jet operators as demand for private planes in regions such as Asia increases.
Canada and the U.S. accounted for about half of all business-jet deliveries last year, compared with about 20 percent for Europe, 14 percent for the Asia Pacific region, 10 percent for Latin America and 7.1 percent for the Middle East and Africa, according to data from the Washington-based General Aviation Manufacturers Association.
“Business aviation is coming back from the recession of 2008, and we have more expansion years ahead of us,” Ridolfi said. “For the most part, business aviation has been a North American phenomenon. As this business becomes truly global, you will see these airline-like entities who fly passengers for a fee growing. Their fleets tend to be larger. As the market comes back, we expect to see more orders.”
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