By Canadian Press

European rail manufacturers announce deal, leaving Bombardier out in cold

Sep 26, 2017 | 2:15 AM

MONTREAL — European railway manufacturers Siemens Mobility and Alstom announced a merger Tuesday that leaves Montreal-based Bombardier Transportation facing a new “European champion” and a substantially larger rival.

The memorandum of understanding announced Tuesday is described as a merger of equals with each owning half the shares of the new company to be headquartered in Paris. The Mobility Solutions business will be run out of Berlin.

The combined company to be called Siemens Alstom will have US$18 billion in revenues — about double that of Bombardier Transportation — and US$1.4 billion in adjusted EBIT. Annual cost savings of US$554.2 million are expected four years after closing.

The new European company with 62,300 employees in more than 60 countries will have an order backlog of US$72 billion and an adjusted margin of eight per cent.

“We put the European idea to work and together with our friends at Alstom, we are creating a new European champion in the rail industry for the long-term,” Siemens CEO Joe Kaeser said in a news release.

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He added that the global market has changed with the creation of a dominant competitor in China and digitalization.

Bombardier (TSX:BBD.B) didn’t immediately respond to the merger of its rivals. It is also believed to have talked to Siemens.

Mergers in China and Europe leave Bombardier “still looking for a dance partner,” said David Tyerman of Cormark Securities.

“They lost out this time but there’s presumably going to be more consolidation,” he said, noting competitors of varying sizes remain around the world.

Bombardier’s shares closed up more than six per cent to C$2.27 in Tuesday trading even though the transportation giant was expected to face bad news affecting both its commercial aircraft and railway businesses.

The shares surged more than 13 per cent after a report out of China said Bombardier is close to signing orders for commercial aircraft.

Walter Spracklin of RBC Capital Markets said he expects Bombardier will remain a key player in a growing transit market.

“An overall modernization of infrastructure in developed countries, and a rapid urbanization coupled with environmental concerns in developing countries will prop up rail demand for decades to come in our view,” he wrote in a report.

Analyst Cameron Doerksen of National Bank Financial said Bombardier Transportation can still succeed as a standalone company.

Bombardier Transportation would be the world’s third-largest railway company with a strong presence in France, Germany and Britain. It has a four-year backlog of orders and is moving towards an eight per cent EBIT margin.

Under a proposed merger with Siemens, Bombardier would have reportedly ceded control of signalling and maintained only marginal control over a separate rolling stock joint venture.

“Given the cyclicality of Bombardier’s Aerospace operations, in our view, it was important that Bombardier maintained control of Bombardier Transportation,” he wrote in a note before the Siemens-Alstom merger was announced.

The industry is undergoing consolidation to compete with the state-backed rival Chinese railway manufacturer CRRC that is growing its global reach.

Doerksen added that the near-to-medium-term threat from the state-owned CRRC Chinese railway is exaggerated since only about 8.5 per cent of its revenues last year were outside of China and it has little presence in Western Europe.

China’s cost advantage may also be limited since most buyers require significant local content, forcing CRRC to build new manufacturing facilities in major markets.

Ross Marowits, The Canadian Press