Textron has reportedly been in talks for several weeks to buy Bombardier’s business jet unit, according to the Wall Street Journal, but a deal may never come to fruition.
Talks between the two plane makers are parallel to discussions by Bombardier to potentially sell its transportation division to Alstom, which have stalled over valuation.
“Those good old ‘people familiar with the matter’ leaked the story and sent shares of both companies shooting up in response,” said Robert Stallard, an equity analyst with Vertical Research Partners.
Whether Bombardier should sell off the business jet division or the rail division, “Bombardier is still facing a monster $1.5 billion debt repayment next year,” Stallard said.
Textron and Bombardier declined to comment.
A potential deal could be about 20% accretive in 2021 for Textron, which would likely use $500 million in cash and $6.2 billion of debt to buy the asset, Jefferies equity analyst Sheila Kahyaoglu wrote in a note to investors.
The potential acquisition would allow Textron Aviation to enter the heavy jet business with the Challenger 650 and Globals. The combined assets would give Textron about 55% of the market on a unit basis, Kahyaoglu wrote.
Investors do not want Textron to “double down” in the business jet market, although management has a successful track record in turning business around with a successful integration of financially-troubled Beechcraft in 2013, she said.
With the state of the current industry, price discounting has been common. Consolidation could lead to increased price discipline, which would be a positive for Gulfstream. In the long term, Textron’s aircraft development times could be cut as well, Kahyaoglu wrote.
The business jet market is overcrowded, with five main manufacturers building 40 different models and vying for about 700 worldwide orders a year, consultant Brian Foley noted. A Textron purchase would only somewhat alleviate the overcrowding.
Bombardier’s Learjet division would overlap with Textron Aviation’s Citation jets. And Bombardier’s Challenger 350, or CL350, sits “almost exactly on top of Cessna’s brand-new Citation Longitude,” Foley said. It’s been six years since the CL350 debuted “and it’s arguably in need of a makeover.”
The Challenger 650 was last updated at about the same time. But the CL 650 is an older design and has undergone many upgrades over time with engines, avionics and other improvements.
“There’s really nowhere left to go,” Foley said. “It’s likely that Cessna has a product path for its new Longitude, call it the Longitude+, that could conceivably position itself squarely between the CL350 and CL650, essentially eliminating both models.”
That leaves Bombardier’s most lucrative and largest line of jets, the Global line, “ripe for Textron to plug it into its current line of small and medium jets, giving it the long-missing large products to effectively compete with the likes of General Dynamics’ Gulfstream and Dassault’s Falcon units.”
Textron is the only business jet manufacturer that would make sense to buy the unit, he said. Embraer is busy with a Boeing deal and Gulfstream and Dassault each have competing large cabin products. There could be other potential bidders.
For one, Airbus could be interested since it has a relationship with Bombardier through the A220 airliner. Mitsubishi bought Bombardier’s regional jet division last year. Lockheed Martin’s name has been tossed out as a suspect. And private equity has invested in business jet manufacturing with former ownership of Gulfstream, Hawker Beechcraft and others.
“There’s also a good chance that a Textron deal will never come to fruition,” Foley said. Textron’s financial performance has been stressed so it may be a stretch to pay what would likely be in the billions for the division.
“It’s more likely that Textron waits it out until Bombardier feels more heat from its debt load, or in a worst-case scenario enters bankruptcy and jettisons much of its debt,” he said.
