MONTREAL — The Globe and Mail reports that Paul Tellier faces major challenges turning around Bombardier Inc. and the measures he may be forced to take include everything from a dividend cut and writedowns of assets to a major restructuring or an equity issue, analysts say.
Meanwhile, bond rating agency Standard & Poor’s Corp. said yesterday it has put Bombardier and its subsidiaries on credit watch with “negative” implications, reflecting uncertainty over the company’s ability to reach profit and cash-flow targets in the wake of president and chief executive officer Robert Brown’s resignation on Friday.
Mr. Tellier, who is leaving as head of Canadian National Railway Co., is to take the helm at Bombardier on Jan. 13, replacing Mr. Brown as top executive at the world’s third-largest civil aircraft manufacturer and biggest maker of railway transportation equipment.
Montreal-based Bombardier’s shares have plummeted 67 per cent this year on concerns over its ability to weather the severe downturn in the business-jet market as well as fears it won’t maintain sales levels for its popular line of regional jets.
Mr. Tellier, a Bombardier director since 1997, acknowledged last Friday that Bombardier’s share performance is unacceptable and said he wants to “re-energize” the company.
“The challenges are sizable and plentiful,” Steve Laciak, analyst with National Bank Financial, said in a bulletin yesterday.
He believes Mr. Tellier will end up lowering his predecessor’s forecast that the company will earn 70 cents a share and generate free cash flow of $1.3-billion for the year ending Jan. 31.
In August, Bombardier cut its earnings per share forecast for the fiscal year to 70 cents from 89 cents, its first profit warning yet. Mr. Laciak expects Mr. Tellier to clean up the balance sheet by the end of March, a move that could entail charges of more than $1-billion. The charges would stem from such financial headaches as Bombardier’s $1.6-billion gap in its underfunded pension fund, a $1.4-billion cost dispute related to the acquisition of the Adtranz passenger rail unit from DaimlerChrysler AG in May of last year, more than $3-billion of unamortized aircraft-asset costs, and major issues connected to the divestiture of portfolios in finance unit Bombardier Capital, Mr. Laciak said.
With debt at a whopping $13.3-billion and equity at only $4.7-billion at the end of October, a “significant equity issue” is likely as well, he said. Cameron Jeffreys of Credit Suisse First Boston Corp. said scenarios under Mr. Tellier include “possible charges to certain aerospace programs” and a decrease in aircraft production, especially turboprops and business jets but also possibly regional jet cuts later next year.
Peter Rozenberg of UBS Warburg Inc. in Toronto agrees that earnings and free cash flow targets likely will not be attained.
“In our view, Bombardier may have to take charges and a major restructuring may need to take place, which could suggest more downside risk in the short term.”
A major concern is how United Airlines parent UAL Corp.’s recent filing for bankruptcy protection will play out, Mr. Rozenberg said. Financing difficulties could result in delivery delays of Bombardier regional jets to UAL feeder carriers.
Ihor Danyliuk of Merrill Lynch Canada estimated in a research comment that writedowns over the next two to three years could add up to between $1.5-billion and $2-billion, or $1 to $1.50 a share.
“Given the current net debt ratio of 77 per cent and book value per share of $3.04, we believe an equity issue is likely.”
He also believes the 18-cent dividend “should not be considered secure.”
S&P analyst Kenton Freitag said in a report yesterday that the credit watch was prompted by near-term concerns, notably: Bombardier’s ability to generate enough free cash flow to substantially reduce short-term debt; its success in winding down or selling portions of its Bombardier Capital portfolio; and the potential impact of the difficulties in the U.S. airline industry.