Bombardier Inc. was pushed into the hands of Airbus SE after holding talks with Chinese investors that went nowhere and secret negotiations by Ottawa with Boeing Co. failed to end a lawsuit against its Canadian rival.
Hamstrung by a debt load of $8.7-billion (U.S.) and a lingering perception that it did not have the resources to play in the big leagues of global plane making, Bombardier was struggling to sell the C Series. In recent months, chief executive Alain Bellemare concluded the fate of the company and the aerospace industry in Canada were at stake. So he made it a priority to find a partner for the C Series, according to sources who spoke on condition they not be identified.
In August, with Quebec's blessing and after exploring three separate options over several months – including a partnership with Boeing, selling a piece of the C Series to a Chinese company and shutting down the program – he turned to a familiar face as a fourth option. He called Airbus chief executive Tom Enders.
The two companies resumed talks on a C Series pact that had broken off two years earlier. And in less than three months, they reached a deal that will change the face of the global aerospace industry. Airbus will control the C Series limited partnership with a 50.01-per-cent stake, bringing to the venture its brand name and industrial power while paying nothing. It has an option to buy out Bombardier and Quebec as minority partners in several years.
The deal is an extraordinary development for Bombardier and its founding family, finally bringing within reach their aspiration to become a force in single-aisle commercial jets in addition to business aircraft and passenger trains. But obtaining the credibility that Airbus brings with it as a partner has come at a steep cost. Bombardier did this deal to change, once and for all, the perception that the C Series would fail, observers and insiders said.
Bombardier shares jumped nearly 16 per cent on the Toronto Stock Exchange on Tuesday. It was by far the most heavily traded stock, with 50.8 million shares changing hands as investors bet Airbus will be the key to a better future for the firm.
"I think the decision to do this and the market reaction tells you how much pessimism has been built around what's happening with this company," said Charles Lemonides, founder of ValueWorks LLC, a New York-based investment management firm that holds Bombardier shares. "You remove the pessimism and things look a lot better."
How Bombardier got here is high drama.
The seeds for the extraordinary deal announced on Monday between Bombardier and Airbus really began in 2015, when the Canadian plane maker was starved for cash and on the verge of bankruptcy because of ballooning costs to get the C Series to market. Mr. Bellemare was just months into his new job trying to fix Bombardier as chief executive.
And he quickly proposed a joint venture to Airbus to spin off the C Series, Bombardier's big bet to drive revenue in its commercial aerospace business over the next two decades.
Bombardier was in a bad place financially, but was not acting like it at the negotiating table with Airbus in 2015. Airbus executives had taken every opportunity to mock the C Series to keep Bombardier from getting sales, and Bombardier was not rolling over. Airbus "wasn't the only thing in town" at the time, one source said. "We were looking at all the options."
A French mergers-and-acquisitions executive who advised Airbus in 2015 on the negotiations confirmed Bombardier did not act desperate. On the contrary, it was demanding, he said.
"The deal wasn't done because Bombardier was asking for crazy conditions," said the executive, adding the Canadian company negotiated hard because it believed the C Series project still had considerable value. Had Bombardier been more flexible then, it might have been able to strike a better agreement than the one announced on Monday night, the executive said.
Mr. Enders vetoed the deal in 2015 because he did not like the terms and because Airbus had its own internal issues. Airbus liked the technologically advanced C Series as a potential small-product offering below its own A320 plane. But regulators had not yet certified the C Series and it was not flying commercially, making it an unproven proposition as Airbus grappled with the production start of its bigger A350 aircraft, Mr. Enders told reporters.
Bombardier turned to Quebec, which agreed to invest $1-billion in a C Series limited partnership for a 49.5 per cent stake. Quebec's motivation was always to protect jobs. It was fearful Bombardier would go under.
It survived and Mr. Bellemare started to gain ground with his turnaround plan. But while the noose of an $8.7-billion long-term debt was slackened, it nevertheless put pressure on Bombardier in unseen ways. Behind the scenes, Bombardier continued having trouble selling the C Series to customers worried the company would not be around to deliver and service the planes, sources said. The aircraft is a technological marvel. But there has been no significant sale in more than a year.
To find a more permanent solution that would resolve the market's restlessness over the C Series, Mr. Bellemare still needed a strategic partner.
Sources say Bombardier approached Boeing. But then, in April of this year, the Chicago-based plane maker sued Bombardier under U.S. law, alleging it used unfair subsidies to sell the C Series at "absurdly low" prices. The relationship quickly turned adversarial. Boeing became enemy No. 1 to Bombardier, Quebec and Canada.
Over the summer, Ottawa entered into secret negotiations with Boeing to end the trade dispute, sources say. Bombardier was interested in striking a deal with Boeing that would have created a strategic partnership at the same time as Boeing would have dropped its complaints, but the company refused. Bombardier also explored a C Series partnership with several Chinese state-owned enterprises, including Commercial Aircraft Corporation of China, according to separate sources. But Ottawa was not keen on a deal between the Canadian plane maker and a Chinese partner, and federal officials made their views known to the company and facilitated discussions with Airbus, the sources said.
"We raised the fact that this had to be approved under the Investment Canada Act, and that a deal with the Chinese would be more complicated than a deal with Airbus," a senior government official said. The key problem, as in any deal with companies in China, is the ownership of intellectual property, the official said. "For economic and political reasons, it wasn't an interesting proposition," another source said. "There was no arm twisting, but it was made clear that Airbus was preferable to China."
By late September, Bombardier and Airbus were well into their negotiations when the U.S. Department of Commerce delivered its first of two stunning preliminary decisions to put countervailing duties of 300 per cent on C Series imports into the United States. The duties effectively shut the C Series out of the U.S. market, opening up a new front in a trade battle between Canada and the United States.
On Monday evening, Bombardier shocked the aerospace world by announcing a deal with Airbus. The timing could hardly have been better. Boeing was hosting journalists aboard a new 787 jet being delivered to Qantas in Everett, Wash., and they quickly bolted off the plane to listen to the Bombardier-Airbus conference call, according to the Seattle Times. Bloomberg reports that just hours after Mr. Enders was lampooned in Bild Zeitung's dreaded "Loser of the day" column, he blindsided Boeing with the Bombardier deal, winning control of the most advanced single-aisle jet on the market without spending a penny.
With the deal announced on Monday, Airbus has agreed to do final assembly of C Series planes for the U.S. market at its factory in Mobile, Ala. That arrangement, properly designed with the right work scope, enables the plane to become a domestic U.S. product that is not subject to import duties, Mr. Bellemare said.
Boeing disagrees. J. Michael Luttig, Boeing's general counsel, said on Tuesday that the Bombardier-Airbus pact has "no impact or effect on the pending proceedings" against the C Series. "Any duties finally levied against the C Series ... will have to be paid on any imported C Series airplane or part, or it will not be permitted into the country."
Mr. Bellemare insists Boeing's actions were not the prime motivation for Bombardier's deal with Airbus, saying the Canadian company was after a strategic partner to bring more certainty to the program. "Airbus brings global reach and scale. It gives greater confidence to new customers and accelerates commercial momentum," he said.
But Dominique Anglade, Quebec's economic development minister, told The Globe and Mail: "Did it accelerate the whole thing? For sure."
With a report from Les Perreaux