Aircraft manufacturers announce partnership for C Series

Airbus SE (EPA: AIR) and Bombardier Inc. (TSX: BBD.B) will become partners in the C Series aircraft program. A corresponding agreement was signed yesterday. The agreement brings together Airbus’ global reach and scale with Bombardier’s newest and most modern family of jet aircraft, leaving both partners in a position to fully unlock the value of the C Series platform and create significant new value for customers, suppliers, employees and shareholders.

Under the agreement, Airbus will provide sales, marketing and customer support expertise for the C Series Aircraft Limited Partnership (CSALP), the entity that manufactures and sells C Series aircraft. At the closing, Airbus will acquire a 50.01% stake in CSALP. Bombardier and Investissement Québec (IQ) will respectively own approximately 31% and 19%.

CSALP’s headquarters and main assembly line and related functions will remain in Québec, supported by Airbus global reach and scale. Airbus’ global industrial footprint will expand with the Canada Final Assembly Line and additional C Series production at the Airbus manufacturing facility in Alabama, USA. This strengthening of the program and global cooperation will have positive effects on Québec and Canadian aerospace operations.

The single-aisle aircraft market is a major driver of growth, accounting for 70% of the expected global future demand for aircraft. With aircraft ranging from 100 to 150 seats, the C Series is highly complementary to Airbus’ existing portfolio of single-aisle aircraft, which focuses on the upper end of the single-aisle aircraft business (150-240 seats). The world-class sales, marketing and support networks that Airbus brings to the venture are expected to strengthen and accelerate the commercial drive of the C Series. In addition, Airbus’ supply chain expertise is expected to deliver significant C Series production cost savings.

Airbus is heavily committed to Canada and its aerospace industry, with Canadian suppliers expanding their access to Airbus’ global supply chain. This new C Series partnership is expected to secure jobs in Canada for many years.

“This is a win-win situation! The C Series, with its state-of-the-art design and excellent economy, fits seamlessly with our existing family of single-aisle aircraft, and rapidly expands our product offering into a fast-growing market sector. I have no doubt that our partnership with Bombardier will greatly increase the sales and value of this program, “said Airbus CEO Tom Enders. “This partnership will not only guarantee the C Series and its industrial operations in Canada, UK and China, but we will also bring new jobs to the US. Airbus will benefit from strengthening its product portfolio in the high-volume single-aisle aircraft market, delivering a higher value to our airline customers worldwide. ”

“We are delighted to welcome Airbus to the C Series program,” said Alain Bellemare, President and CEO of Bombardier Inc. “Airbus is the perfect partner for us, for Québec and for Canada. Its global scale, strong customer relationships and operational expertise are essential ingredients to unlock the full value of the C Series. This partnership will more than double the value of the C Series program and ensure that our remarkable and innovative aircraft reaches its full potential. ”

“The arrival of Airbus as a strategic partner will ensure the sustainability and growth of the C Series program as well as the consolidation of the entire Aerospace cluster in Québec. In the current context, partnership with Airbus is, for us, the best solution to ensure the maintenance and creation of jobs in this strategic sector of the Québec economy, “said Dominique Anglade, Québec’s Deputy Prime Minister, Minister of Economy, Science and Innovation, and Minister responsible for Digital Strategy.

Highlights of the Corporate Structure and Agreement

The C Series program is operated by CSALP, in which Bombardier and QI respectively hold approximately 62% and 38% interest. The Investment Agreement contemplates that Airbus will acquire a 50.01% stake in CSALP. Airbus will enter into commercial arrangements for (i) sales and marketing support services for the C Series; (ii) procurement management, including leading negotiations to improve CSALP contracts with suppliers; and (iii) customer support. At the closing, there will be no cash contribution from either partner, nor will CSALP assume any financial debt. The Agreement also provides that Bombardier will continue with its current CSALP financing plan and will finance, if necessary, CSALP cash deficits up to a maximum amount of US $ 350 million during the first year after closure and during the second and three years after closing, up to a maximum total amount of US $ 350 million in both years, in exchange for non-voting shares of CSALP with cumulative annual dividends of 2%, and any excess deficits during those periods shall be proportionally among the holders of Class A shares.

Airbus will benefit from the option rights over all of Bombardier’s participation in CSALP at fair market value, with the value of non-voting shares used by Bombardier limited to the amount invested plus accrued but unpaid dividends, including a right of option that can not be exercised before 7.5 years after closing, except in the case of certain changes in Bombardier’s control, when the right will be accelerated. Bombardier will benefit from a corresponding correction, whereby it may require Airbus to acquire its stake at fair market value after the end of the same period. IQ’s share is redeemable by CSALP from 2023 at fair market value, subject to certain conditions. IQ will also benefit from tag-along rights linked to a sale by Bombardier of its participation in the partnership.

The CSALP Board of Directors will initially consist of seven directors, four of whom will be proposed by Airbus, two will be proposed by Bombardier and one by IQ. Airbus shall have the right to appoint the Chairman of the Board of Directors of CSALP.

Subject to obtaining the required approval of the Toronto Stock Exchange, the transaction also provides for the issuance of Airbus, after the closing, of stock options that may be exercised to acquire up to 100,000,000 Class B shares (subordinated vote) of Bombardier (representing approximately 5% of the total number of Class A shares, multiple voting, issued and outstanding, and Bombardier Class B Shares on a diluted basis, in addition to approximately 5% of the total Class A shares and Class B), at the exercise price per share equal to the equivalent of C $ 2.29 in US dollars, which represents the weighted average price of Class B shares in the five trading days ending on October 13, 2017. The subscription options will have a term of five years from the date of issue, will not be traded on the stock exchange and will have instruments of adjustment and market standard, including in the case of corporate changes, share divisions, non-cash dividends, distributions of rights or subscription options for all shareholders or for the vast majority of shareholders or consolidated.

The issue of underwriting options and their terms have been negotiated between Bombardier and Airbus independently of the market and will not significantly affect Bombardier’s control. An approval of the holder of the securities will be required under the rules of the Toronto Stock Exchange due to the fact that the options will be issued after 45 days from the date the strike price has been established. Such approval is expected to be obtained by written consent of shareholders holding more than 50% of the voting rights attaching to all issued and outstanding shares of Bombardier.

The transaction was approved by the Boards of Directors of Airbus and Bombardier, as well as by the Government Office of Québec. The transaction remains subject to regulatory approvals, as well as other usual conditions in this type of transaction. There is no guarantee that the transaction will be completed and that the conditions to which it is subject will be met. The completion of the transaction is currently scheduled for the second half of 2018.