Bombardier stock jumped as much as 26 per cent in Toronto on Tuesday, the first trading window since news Monday evening that the company had signed a partnership with rival Airbus to make and market its CSeries jets.
The aircraft maker's shares rose as high as $2.97, or 26 per cent, on the Toronto Stock Exchange after closing Monday at $2.36. They closed Tuesday at $2.73, a 15.7 per cent gain.
By the time news of Bombardier's deal to give a controlling interest in its CSeries jet project to Europe-based Airbus broke on Monday evening, the stock market was closed, which meant Tuesday was investors' first chance to act on the news.
Airbus can buy entire business
The deal contains a clause that would give Airbus the right to buy the entire CSeries business from Bombardier in 2025 at a "fair value" to be determined later. At the same time, Bombardier also has the right at that time to sell the entire business to Airbus, if it wants to.
"Effectively at the end of the term both parties have reciprocal rights," Raymond James equity analyst Steven Hansen said in an interview. "Either Airbus can call and decide to purchase out the stake entirely, or Bombardier can choose to sell the stake entirely at a value that will be determined by an independent valuation that will be done at the time."
Investors' initial reaction to the deal was overwhelmingly positive, pushing Bombardier's TSE-listed shares up to their highest level in more than two years.
The unexpected deal came after U.S. plane maker Boeing unexpectedly won a ruling that slapped duties of more than 300 per cent on all CSeries sold in the U.S. Boeing had complained about Canadian subsidies it deemed unfair.
J. Michael Luttig, an executive vice-president and general counsel at Boeing, said the Bombardier-Airbus deal will have no effect on the pending proceedings.
"Any duties finally levied against the [CSeries] ... will have to be paid on any imported [CSeries] airplane or part, or it will not be permitted into the country," Luttig said in a statement.
Bombardier's deal with Airbus is designed to get around those subsidies, Hansen and other Raymond James analysts wrote in a note to clients Tuesday, by moving some of the production of the CSeries to the United States.
That would allow the company to circumvent import duties, since the planes would no longer qualify as imported products.
"Airbus clearly intends to leverage its global supply chain, including plans to build a secondary assembly line for the CSeries at its Mobile, Ala., site to service U.S. customers," the analysts wrote. "Importantly, Bombardier believes aircraft produced at this location would not be subject to the controversial tariffs/duties at the centre of BBD's recent trade spat with Boeing."
Delta Air Lines, whose order of 75 CSeries planes prompted Boeing's subsidy complaint in the first place, said after the announcement that it looked forward to introducing the planes into its fleet.
While the tariffs have been a significant dark cloud on Bombardier's horizon since they were announced, management insisted Tuesday that the deal — first contemplated in 2015 — was not just about the ongoing trade dispute.
"We're doing this deal here not because of this Boeing petition," Bombardier chief executive Alain Bellemare said. "We are doing this deal because it is the right strategic move for Bombardier."
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Hansen said that all things considered the deal could work out well for both sides. "These things come with tradeoffs," he said. "You bring on a partner like Airbus, that comes on with great benefits, but that does also mean you have to give up a portion of control."
"It's quite a good balance they've struck," he said.
Walid Hejazi, a professor of competitiveness at the Rotman School of Management in Toronto, said the deal makes the best of a bad situation for Bombardier.
"This is probably a good arrangement even before the tariffs, but definitely after," he said in an interview. "It was a bitter pill to swallow, but it just tells you the depth of the concern the senior management at Bombardier has about being shut out of the U.S. market."
And the deal could be a lesson to Canadian businesses in other fields to start taking U.S. bluster about trade policy seriously.
U.S. President Donald Trump "wanted to force companies that sell into the U.S. to produce there, and that's exactly what's going to happen," Hejazi said. "Everyone has to give Donald Trump a victory — as difficult as that may be — but this is exactly what he wanted.
"I think this gives Donald Trump and those people that adhere to his position a lot more ammunition to be tough when it comes to the NAFTA renegotiations," he said.
While Bombardier management was trumpeting the deal on Tuesday, it does take out of its own hands an aerospace program that the company has spent more than $6 billion on and championed as its future for more than a decade.
"Bombardier no longer has control of this jet, but then again, it's better to have a 30 per cent share of a very successful program than to struggle with a highly risky program that was perhaps too big for them from the start," aerospace analyst Richard Aboulafia said.