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Can the Learjet–Textron Cessna Combination Fly Higher?

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Rumors of Learjet sale to Textron

Bombardier’s CEO (chief executive officer) Alain Bellemare said in the company’s earnings call in August that the light business jet market is “oversupplied” and “remarkably competitive.” Rumors were flying that month about the potential sale of Learjet to Cessna Aircraft. Learjet is a light business jet manufacturing unit housed by Bombardier (BDRBF). Textron (TXT) released a statement that it would be interested in buying Learjet at the right price. However, there have been no further developments to date.

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While the potential buyer may differ, aviation industry (PPA) observers are saying that Bombardier may indeed be putting Learjet up for sale. Learjet has suffered from an anemic demand for its Learjet 70 and 75 models, which are expensive in the space dominated by Cessna and Embraer (ERJ). Based on figures cited by Cowen analysts, Learjet has apparently lost its market share to Cessna, and its year-to-date 2016 market share is 33% compared to 60% in 2015.

Learjet’s value proposition for Textron

Cowen analysts are advocating the combination of Cessna and Learjet on sound reasoning that both are based in Wichita, Kansas. Analysts have alluded to the benefits of enabling existing Learjet customers to upgrade to new models of Cessna aircraft. Major benefits on the cost side include consolidation of existing facilities and savings from reducing duplicate jobs. Since both companies are located in the same city, communication with leadership and other logistics could be very quick.

In the last industry contraction, Textron paid $1.4 billion to acquire Beechcraft. That came at an EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 6.5x. Learjet is likely to deliver around 30 aircraft this year at an average value of $12 million per jet. That’s about $360 million in revenues. By benchmarking the 8%–9% EBITDA margin of Textron and Embraer (ERJ), the value of the deal may not bring in a lot of cash for Bombardier.

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