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Bombardier stock soars as analysts applaud C Series deal with Airbus

Briefing highlights

  • Bombardier stock surges
  • Analysts applaud C Series deal
  • OSFI tweaks mortgage rules
  • Markets at a glance
  • Goldman Sachs beats estimates
  • Morgan Stanley posts profit gain

Bombardier Inc. shares are surging on its deal to sell Airbus Group SE control of its hallmark C Series program, which analysts say gives the Canadian plane maker the heft it needs in a highly competitive market and a hostile U.S. trade regime.

The stock was up by more than 22 per cent soon after markets opened.

"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 of Teal Group told Reuters.

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As The Globe and Mail's Nicolas Van Praet reports, Bombardier and Airbus announced late Monday that the European company will take a 50.01-per-cent stake in the C Series program. There's no cash involved.

Bombardier will hold 31 per cent, and Quebec about 19 per cent.

Key to the agreement is that, while current assembly of the plane will remain in Quebec, Airbus has pledged plant space in Alabama.

Bombardier has been hit with massive preliminary duties in the U.S. in a trade dispute with Boeing Co. over a big C Series sales to Delta Air Lines.

While many analysts believed Boeing's claim was unjustified, it came during a new trade era in the U.S., where the Trump administration has taken off the gloves.

"This is a program that has been waiting for a deus ex machina, and wow, it really got one," Mr. Aboulafia told Bloomberg.

While Airbus now looks like a global company, Boeing appears "a bit shortsighted and protectionist. It makes Boeing look like they've been playing tic tac toe against a chess master," Bloomberg reported.

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Bank of Montreal analyst Fadi Chamoun was equally upbeat, saying he expects the deal to be "well received."

"From the perspective of BBD shareholders, the deal reduces risk while providing the potential for a significant upside scenario to valuation that would not have been contemplated otherwise," Mr. Chamoun said in a research note.

"From the perspective of Airbus, the C Series represents a complementary product to the company's existing narrow body aircraft offering," he added.

"For [Bombardier], the deal redusces risk and opens up the opportunity for the program to achieve commercial success that would have been nearly impossible to contemplate otherwise. While the company's share in the program is lowered to 31 per cent, the value associated with the reduced stake is likely much higher."

Boeing described the marriage as a "questionable deal between two heavily state-subsidized competitors" to get around the Trump administration.

But while Quebec remains the home, Airbus "anticipates growing demand for C Series would result in a second assembly line in Mobile, Ala.," Mr. Chamoun noted.

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"With over 50 per cent of C Series content already sourced in the U.S., assembling in the U.S. also would likely neutralize the impact of trade tariffs on the C Series."

Desjardins analyst Benoit Poirier also heralded the deal.

"Over all, we view the announcement as positive for Bombardier as the partnership represents a strong endorsement that is expected to create shareholder value in the long term," he said.

"We maintain our buy rating and $3.25 target price."

Here's what other analysts are saying:

"We are adding Bombardier to the Raymond James Ltd. analyst current favourite list based upon recent news that the firm has struck an agreement to sell a majority stake in its C Series platform to Airbus, a transformational deal that is expected to: 1) accelerate the program's commercialization momentum; 2) reduce unit production costs; and, 3) bolster confidence in the company's goal to reach cash flow breakeven by the end of 2018." Steve Hansen, Raymond James

"Both Airbus and Bombardier management indicated that the recent U.S. trade decision was not the primary factor in the transaction occurring, but rather a product of a continued derisking at both Airbus and with the C Series over the past two years from when an agreement was first envisioned. While we see Airbus as being opportunistic in its timing, we believe this announcement should be positively received by shareholders and bondholders." Chris Murray, AltaCorp Capital

"The main risk would appear to be only that Airbus gets distracted," Sandy Morris, Jeffries

"There are a lot of unserved markets in the U.S. but my guess is the biggest new market potential is in Asia. Boeing will not have a response and that's going to make it tougher for them to compete. This sharpens the battle lines." Torbjorn Karlsson, Korn Ferry International, to Bloomberg

"Interest in the CSeries has been low in this region and having Airbus supporting the program could be a big boost," Brendan Sobie, CAPA Centre for Aviation, to Reuters

"Potential buyers of the CSeries are now given comfort with Airbus becoming a major shareholder thus ensuring stability in the program." Shukor Yusof, Endau Analytics, to Reuters

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OSFI tweaks rules

Canada's banking regulator has tweaked its new mortgage stress-testing rule, ensuring home buyers will not have an unintended incentive to sign up for shorter-term mortgages, The Globe and Mail's Janet McFarland and James Bradshaw report.

The Office of the Superintendent of Financial Institutions published revised final guidelines for its controversial stress-testing rule, which requires buyers making down payments of more than 20 per cent of a home's value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiated.

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