Germany’s Siemens and Canada’s Bombardier are in talks to combine their rail operations, two people close to the matter told Reuters, a move that could strengthen their hand against Chinese state-backed market leader CRRC Corp.
The joint venture would create a company whose sales of US$16 billion would be half those of CRRC, the result of a 2015 merger of China’s top two players, and would leave France’s Alstom left out of the industry’s consolidation.
Rail consolidation has been a trend over the last few years, as global companies seek to contain costs and Western players struggle with the rising ambitions of China at home and abroad.
The top three runners-up, Bombardier, Siemens and Alstom, have talked to each other about combining their businesses in various arrangements over the past years. This would be the third attempt by Siemens and Bombardier, one of the people said.
“Talks are occurring and are already pretty far advanced,” said one of the sources, who asked not to be named because the negotiations are confidential.
Siemens and Bombardier declined to comment, as did Canadian pension fund Caisse de dépôt et placement du Québec, which owns 30 percent of Bombardier’s train business.
The news, earlier reported by Bloomberg, lifted Siemens shares to a record high of 129.80 euros. The stock later slipped back, but closed near the top of the German blue-chip DAX, which was down 0.5 percent.
Bombardier shares rose 2.7 percent to 2.28 dollars by 1620 GMT.
The deal would require clearance from anti-trust authorities and face potential opposition from unions. It is not yet clear which of Siemens or Bombardier would eventually consolidate the entity in the event of an agreement, one of the sources said.
That person said the last time the two attempted to merge, the deal fell apart because of opposition from European anti-trust authorities.
That could be a problem this time, since the joint venture would further consolidate an industry that has already dwindled to a handful of players.
ALSTOM THE LOSER
That would leave Alstom with few options, said a London-based analyst, who asked not to be named because he is not authorised to speak to the press.
“If Siemens were to merge potentially with Bombardier, then obviously Alstom would be the loser in the scenario,” he said. “Alstom needs to consolidate the market … but there are not so many targets out there.”
Union representatives in Canada and Germany said they were not yet aware of any rail merger talks.
Siemens lost out to U.S. rival General Electric in a bid for Alstom’s energy business in 2014. Siemens Chief Executive Joe Kaeser later boasted that he had made GE raise its price by entering the fray.
Siemens’ and Bombardier’s transport businesses are roughly comparable in size. With a combined 2016 operating profit of US$1.28 billion, the joint venture could be valued anywhere between US$14 billion and US$27 billion, according to the multiples of listed peers.
German industrial group Siemens, which has shed units from hearing aids to home appliances to focus on core activities like factory automation, has turned its transportation division around after years of poor project management in rolling stock.
It still faces challenges, though, with drops in Chinese and rail infrastructure revenue last year. Its technological strengths are in signalling and railway technology.
Aerospace-to-financial services group Bombardier, which is short of cash, has been looking at selling its rail division for some time.
The unit has faced high costs due to technical challenges on a series of programs and had a 10 percent slump in revenue last year.
Bombardier’s bonds continued a 14-month rally on Tuesday, while its credit default swaps fell 5 percent.
“It’s such a capital-intensive business, and if you’re able to partner with a company on that scale and that has a more global focus that would make a lot of sense,” said Bryden Teich, portfolio manager at Toronto-based Avenue Investment Management, which does not hold the stock.
Update: The Caisse announced a $2.1 billion (US$1.5 billion) convertible share investment in Bombardier’s rail arm in 2015. The deal was closed in February 2016.
By Alexander Hübner and Andrea Shalal
(Additional reporting by Jens Hack in Munich, Allison Lampert in Montreal, Dan Burns in New York, Matt Scuffham in London, Cyril Altmeyer in Paris, Denny Thomas and Alastair Sharp in Toronto and Arno Schuetze in Frankfurt; Writing by Arno Schuetze and Georgina Prodhan; Editing by Mark Potter and David Evans)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
Photo courtesy of Bombardier