(Bloomberg Opinion) -- Canadian transportation champion Bombardier Inc. is running out of road. Its shares lost more than one-third of their already much diminished value last week after another disastrous profit warning.
The trains and private jet manufacturer may be forced to exit its commercial aerospace joint venture with Airbus SE because of a shortage of cash; a writedown looms when the group reports 2019 results next month. In the meantime, it’s looking at ways to accelerate repayment of its $10 billion debt pile, which suggests a breakup might be on the cards. Bombardier has held talks about a combination of its rail businesses with French rival Alstom SA, Bloomberg reported on Tuesday, adding that this is one of several options being considered.
On the other side of the Atlantic another storied industrial conglomerate, ThyssenKrupp AG, is suffering a comparable crisis. The German steel and car-parts maker has put its prized elevator division up for sale to help with its massive debt and pension liabilities.
When their respective restructurings are completed, these vast and politically important employers will be shadows of their former selves. ThyssenKrupp has already been booted from Germany’s benchmark Dax index, while Bombardier’s on the cusp of becoming a penny stock (again).
So how did they get into such a mess and why haven’t they managed to extricate themselves, despite years of restructuring and several false dawns? In both cases, hubris, shoddy governance and poor project management have played a role in their downfall.
The fate of the two companies was sealed around a decade ago when they bet the farm on high-risk growth strategies — and lost. Bombardier signed off on the C-Series, an ambitious attempt to break Airbus and Boeing Co.’s lock on the commercial aerospace market. The small, fuel-efficient jet won rave reviews but orders were disappointing and delays caused costs to balloon to about $6 billion and debt to pile up. Bombardier made things worse by trying to bring several new business jets to market at the same time. Weak sales forced it to abandon development of the Learjet 85 — resulting in a $2.5 billion writedown — and to cede control of the C-Series to Airbus for the humiliating sum of one Canadian dollar.
ThyssenKrupp’s original sin was sinking about 12 billion euros ($13.3 billion) into a pair of steel plants in Brazil and the U.S. to try to keep pace with the acquisitive ArcelorMittal SA. Poor construction work and a faulty business plan led to massive losses from which ThyssenKrupp has never really recovered.
Woeful governance had a hand in both corporate disasters. Bombardier has a dual-share structure that gives the founding Bombardier-Beaudoin families majority voting control even though they own a much smaller fraction of the share capital. Pierre Beaudoin served as chief executive officer from 2008 until 2015 — during which time his father, Laurent, remained chairman — but he didn’t do a very good job. Pierre is now the chairman.
ThyssenKrupp’s anchor shareholder, the Krupp Foundation, presided over a management culture that prized fealty and the preservation of corporate perks, including the company’s hunting grounds, but failed to prevent compliance breaches. Recent boardroom fireworks at the German giant (two chief executives and a chairman have departed in quick succession) suggest it remains dysfunctional.
In their attempt to stop the rot, ThyssenKrupp and Bombardier have followed a similar script. Scrap the dividend, sell underperforming assets, slash thousands of jobs and cut costs. But the cash flow needed to cut debt has never consistently materialized and things have got worse.
In 2019 ThyssenKrupp burned through 1.1 billion euros of cash and it expects to consume even more in 2020, risking a breach of banking covenants. Bombardier burned about $1.2 billion in cash last year, far in excess of the roughly break-even target it set at the start of the year.
A problem for both companies has been estimating the cost and completion date of large projects. It’s one reason why ThyssenKrupp’s industrial plant construction unit — once a decent source of cash flow from large customer prepayments — has become a bottomless money pit (the unit is now up for sale). At Bombardier, several high-profile train projects have run late and over budget. Bombardier must pay penalties for late delivery.
Judging by their balance sheets, both companies appear to be in trouble. ThyssenKrupp has just 2.2 billion euros in net assets, while Bombardier’s liabilities far exceed its reported assets.
However, unlike Bombardier’s, ThyssenKrupp’s bonds still trade well above par and its 7.4 billion euros market capitalization is almost four times that of the Canadian company. That’s because ThyssenKrupp still has something of value to sell: The elevators unit could fetch more than 15 billion euros if management decides to part with all of it (the sale process is ongoing and ThyssenKrupp might opt to keep a majority stake).
Bombardier doesn’t face an immediate cash crunch thanks to the proceeds of recent asset sales and no big debt maturities this year. But having already offloaded its ageing Q400 turboprop aircraft line and its Belfast wing factory, it’s not exactly overburdened with stuff to sell to meet future liabilities.
Neither of Bombardier’s two remaining core divisions, trains and private jets, is worth as much as ThyssenKrupp’s elevators. In 2015 Bombardier sold a 30% stake in its rail division to the Quebec public pension fund, valuing the whole unit at $5 billion. The business aviation division would probably fetch more.
For both businesses, the difficulty with flogging more silverware is that what’s left over probably won’t generate much profit.
The moral of these twin corporate calamities is simple: If tens of thousands of people depend on you for employment, don’t bite off more than you can chew. And make sure the higher-ups know what’s going on.
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Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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