FRANKFURT/BERLIN (Reuters) - Germany’s Siemens (SIEGn.DE) and Canada’s Bombardier (BBDb.TO) are in talks to combine their rail operations, two people close to the matter told Reuters on Tuesday, an action that could strengthen their hand against Chinese state-backed market leader CRRC Corp (601766.SS).
The joint venture would create a company whose combined sales of $16 billion would be half those of CRRC (601766.SS), the result of a 2015 merger of China’s top two players, and would leave France’s Alstom (ALSO.PA) 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 companies 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, also a maker of aircraft, declined to comment, as did Canada’s second-largest pension fund, Caisse de depot et placement du Quebec, which owns 30 percent of Bombardier’s train business.
The news, earlier reported by Bloomberg, lifted Siemens shares to a record 129.80 euros. The stock later slipped back. Bombardier shares rose 6.7 percent to 2.37 Canadian dollars.
Despite positive market reaction, analysts said antitrust concerns in Europe remain the biggest threat to a deal. The combination also faces potential opposition from unions in the run-up to Germany’s fall elections.
One Canadian transportation analyst, who declined to be identified because he was not authorized to speak to the media, said Bombardier is unlikely to sell the stake outright to Siemens because the company’s founding family would want to keep control of the division within the company. The family holds control of Bombardier through its dual-class share structure.
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 antitrust 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 companies.
That would leave Alstom with few options, said a London-based analyst who asked not to be named because he is not authorized 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’ and Bombardier’s transport businesses are roughly comparable in size. With a combined 2016 operating profit of $1.28 billion, the joint venture could be valued anywhere between $14 billion and $27 billion, based on multiples of listed peers.
Germany’s Siemens, which has shed units from hearing aids to home appliances to focus on core activities such as 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 strengths are in signaling and railway technology.
Bombardier, which has about $9 billion in net debt, has been open to monetizing its rail business for some time. The unit has faced high costs because of technical challenges on a series of programs and had a 10 percent slump in revenue last year.
Quebec, which agreed to invest $1 billion in Bombardier’s CSeries jet program, declined to comment, a spokesman for the province’s premier, Philippe Couillard, said on Tuesday.
“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.
($1 = 0.9416 euros)
($1 = 6.8893 Chinese yuan)
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