By Allison Lampert and Kevin Dougherty
MONTREAL/QUEBEC CITY, Oct 30 (Reuters) - Quebec's $1 billion
bailout for aerospace company Bombardier Inc BBDb.TO is meant
to protect thousands of jobs in one of the province's top
industries, but risks worsening the finances of Canada's most
indebted province if it fails.
The deal would give Quebec's Liberal-run government a 49.5
percent stake in Bombardier's troubled CSeries jet program,
according to the announcement on Thursday, easing shareholder
fears about the company's future but triggering an outcry from
taxpayer advocates and opposition politicians.
"This is what we call corporate welfare," said Aaron
Wudrick, the federal director of the Canadian Taxpayers
Federation, adding the deal could lead to long-term costs for
Quebec taxpayers if it fails.
The province, which has practically frozen money for social
services and education as it tries to balance its budget in the
current fiscal year, had a deficit of C$2.35 billion for the
last year ended March 31. There is also public disenchantment
following a wide-ranging corruption probe into the awarding of
construction contracts.
But the fortunes of Quebec's aerospace sector are closely
tied to those of Bombardier, a household name in the province.
Its 18,000-strong workforce in Quebec is largely
aerospace-focused and its presence in the province helps support
many smaller part vendors and suppliers in the region.
The aerospace industry makes up about 10 percent of Quebec's
export revenues, about 1.5 percent of its gross domestic
product, and about 40,000 jobs that pay double the provincial
average - making it an economic lynchpin.
Bombardier is majority-owned by the Bombardier-Beaudoin
family, which has traditionally had close connections with the
political establishment in Quebec.
"The decision to do nothing, it's something we couldn't even
consider," Quebec Economy Minister Jacques Daoust told Reuters
after announcing the deal. "The day that Bombardier is in
difficulty, the entire aerospace industry is in difficulty."
Quebec is pumping money into its financing arm
Investissement Quebec to support the CSeries project, but is not
making a broader investment in Bombardier which has a profitable
rail unit.
It is the biggest investment to date made by Investissement
Quebec, which holds stakes in several other companies deemed
critical to Quebec's economic development, such as the Stornoway
diamond mine and the Alouette aluminum smelter.
Bombardier's narrow-body CSeries line of jets, which is set
to compete against Boeing (N:BA) Co's BA.N 737 planes and Airbus
Group's AIR.PA A319 and A320 jets, has been delayed for years
and is billions of dollars over budget. The struggle to get the
CSeries project done and in the air has left Bombardier saddled
with more than $9 billion in debt.
The gamble faces further big risks as new orders for the
CSeries jet have dried up in a soft market.
Bombardier touted the fuel economy of the CSeries, which has
a 20 percent fuel burn advantage over comparable planes, as a
key selling point. But that advantage has been lessened by lower
oil prices and competition from new generation planes built by
Boeing and Airbus that have been outfitted with fuel efficient
engines.
In a bid to raise cash, Bombardier has been looking at a
wide range of options, including the sale of a stake in the
CSeries and the sale of a minority stake in its rail arm.
AUTOS BAILOUT
Credit analysts likened the Quebec deal to the $13.7 billion
federal and provincial bailout of Canada's autos industry in
Ontario during the financial crisis.
"If you look at what happened in Ontario, you would probably
conclude that it did work out in that case," said Douglas
Offerman, a senior director at Fitch Ratings. "I think (the
Quebec) deal speaks to the province's desire to ensure that it
remains a center for aerospace."
"Doing something, or not doing something both decisions in
some respects are a gamble on the unknown," he said.
DBRS Quebec debt analyst Travis Shaw said the investment was
"not unmanageable" for the province but more information was
required to gauge whether it could affect Quebec's plan to
balance its budget.
Daoust, who said the investment would not impact the
province's budget, said Quebec's risk is limited to the $1
billion investment in the CSeries. He said it would generate
returns if the program is a success, but lead to losses if it
fails.
"It's a risky situation, but it's a two-way street," he
said. "We took it from the positive side."
Daoust said the province has no obligation to put in
additional investment if Bombardier's expenses rise more than
expected.
Bombardier's CEO Alain Bellemaire said the issue of the
company's dual class share structure - which has been criticized
by investors and analysts - did not come up in its negotiations
with Quebec on the CSeries.
The Bombardier-Beaudoin family controls 85 percent of the
super voting "A" shares which have 10 times the number of votes
as the "B" shares. In total, the family has a roughly 54 percent
voting stake in the company.
"PITIFUL NEGOTIATORS"
Critics of the deal said it raises broad questions about the
use of public funds to support private companies.
"We tear our hair out when we see that there is no private
money that is willing to back an entity like Bombardier, and the
government steps in," said Wudrick of the taxpayers federation.
In the Quebec National Assembly, Pierre Karl Péladeau,
leader of the Parti Québécois opposition said the government
acted as "pitiful negotiators" and was assuming "all the risks
for the benefit of the shareholder."
A spokesman for economy minister Daoust said the government
hired an external firm to conduct due diligence on the CSeries
before signing the deal with Bombardier.
Quebec teachers and civil servants, who are among about
541,000 public-sector employees trying to negotiate a new
collective agreement, staged a one-day strike across the
province on Thursday carrying banners that read: "1 billion for
Bombardier, cuts for needy students."
Before the latest announcement, Bombardier had received
about C$730 million in contributions and loans from the federal
government since 1984, according to data compiled by the
Canadian Taxpayers Federation.