POLITICS

Heroux-Devtek sees risks to suppliers if Ottawa abandons F-35 purchase

12/18/2012 01:30 EST | Updated 02/17/2013 05:12 EST
MONTREAL - If Canada abandons the purchase of F-35 fighter jets it could have negative long-term consequences for current suppliers for the costly aircraft, the head of landing gear company Heroux-Devtek said Tuesday.

The Quebec-based company has about $150,000 of content on each plane for the landing gear door uplocks it supplies. That's down from about $750,000 before it sold its aerostructure business this summer.

Gilles Labbe said he's confident about retaining the existing work but said winning additional contracts will be "very difficult" if the federal government instead purchases a different aircraft.

The Harper government is reviewing the planned purchase of 65 of the Lockheed Martin fighters after a KPMG report warned that the planes could cost as much as $45.8 billion over 42 years, including maintenance and other costs. That's far more than the $9 billion set aside by the Defence Department.

"I'm a believer that this is a great program," Labbe said following a special meeting where shareholders approved a $157-million special dividend.

Labbe said he believes more than 3,000 airplanes will ultimately be sold and noted the Canadian aerospace industry gained access to work on the plane after joining the program early on.

But if Canada changes course and other countries such as South Korea and Israel decide to purchase the aircraft, they will want a piece of the economic benefits.

"We'll see what the client decides. It's possible that we will have less work in the future but we are pretty confident to keep what we already have."

Labbe declined to say what decision he thinks the government will make, but noted there could still be economic benefits to the Canadian industry if it selects a different plane.

The government could opt for the less expensive Saab Gripen from Sweden, France's Dassault Rafale or the Typhoon Eurofighter. Heroux-Devtek has little or no involvement in those aircraft.

Meanwhile, Labbe said Heroux-Devtek hopes to make a strategic acquisition within the next year to buttress its position as the world's third-largest landing gear manufacturer.

He said the company has enough financial flexibility to fund growth despite making the $5 per share payment. It used $54 million from the $232 million of net proceeds from the August sale to wipe out its debt. It also has more than $50 million of cash and access to $150 million in credit.

"Our shareholders have been patient over the years... and I think it was time to do something for (them)," he said, adding that the sale prompted its shares to surge.

As its fourth-largest shareholder with 12 per cent of the company, Labbe himself netted nearly $19 million from the payout.

The special payment is to be made Wednesday to shareholders of record Nov. 20. It will consist of $2.70 per share consisting of a partial reduction and repayment of the corporation issued capital, and $2.30 per share in dividend.

The move will exempt shareholders from tax on the $2.70 per share portion.

Labbe said the company will consider expansion of existing facilities or build new ones if required to serve the needs of new clients. It has invested millions of dollars so its 100 engineers could design and build landing gear for military and commercial aircraft, including the Learjet 85, Embraer Legacy 500 and Dassault's new business plane.

As for being a takeover target itself, Labbe said the board would consider any offers but it isn't looking to sell.

"For now the company is not for sale. We have no process in place. I still have the desire with my team to continue to build the company as I have done for 30 years."

Benoit Poirier of Desjardins Capital Markets said Heroux-Devtek has sufficient liquidity to pursue acquisitions. Potential targets include ELEB, APPH, Fokker Aerospace and CIRCOR Aerospace.

Despite softness in the military segment, he said the company continues to win new contracts, such as the five-year deal with Boeing to manufacture landing gear for its H-47 Chinook helicopter. There is also the possibility of an additional 70 to 80 units for the Global Hawk and Heroux has a strong aftermarket segment that represents 27 per cent of total revenues.

"We believe Heroux-Devtek should soon benefit from its investments of more than $135 million over the last five years, which have led to a number of contract wins," he wrote in a report.

In civil aviation, Poirier said the company is well-positioned to profit from the ramp up of production by Airbus and Boeing.

On the Toronto Stock Exchange, Heroux-Devtek shares closed up 13 cents at $12.72 in Tuesday trading.