German industrial conglomerate Siemens AG is in talks to combine
its rail unit with Canada-based Bombardier Inc.'s train business,
people familiar with the matter said.
The talks between two of the world's largest train makers are at
an early stage and a deal is far from guaranteed, the people said.
Bombardier is also talking to other possible partners, two of these
people said.
Bombardier is simultaneously preparing to float a minority stake
of its transportation unit, which is based in Berlin, on the
Frankfurt Stock Exchange this fall to strengthen its balance
sheet.
"There is little specificity around Bombardier's plans to float
the minority stake in its rail business in Germany later this year,
but there are two issues at play. One is cash … [and the] other is
consolidation, since the creation of a Chinese powerhouse through
the merger of CSR Corp. and China CNR makes the landscape more
challenging and elevates the importance of scale," J.P. Morgan
analysts said in a recent note. The analysts put a price tag of
$5.1 billion on Bombardier's train unit.
Based on revenues, Siemens' train unit is about one-third
smaller than Bombardier's. The Canadian firm's transportation
business posted revenue of $9.6 billion last year while Siemens's
mobility division, which includes its rail businesses, reported
revenue of €7.2 billion ($8 billion) during the same period.
Siemens's rail business comprises about 85% of its mobility
division, according to a calculation by an analyst at J.P.
Morgan.
Munich-based Siemens is slated to announce third-quarter
earnings on Thursday. Analysts expect the company to report weak
earnings, with net profit down 23%, according to a recent poll by
The Wall Street Journal. It isn't clear whether Siemens will
address the rail negotiations with Bombardier at the earnings
conference.
In May, Bombardier Chief Executive Alain Bellemare said he was
considering either a joint venture or partial sale of the rail
unit, in addition to a minority spin off, but dismissed speculation
that the entire rail business was for sale.
Siemens could potentially merge its train operations with
Bombardier's after the partial flotation, another person familiar
with the matter said.
The potential tie-up closely follows a tough second quarter for
Siemens, which has been weighed down by low global oil prices and
an economic slowdown in China. Analysts at J.P. Morgan expect a 6%
drop in orders, driven by declines at the energy and
automated-drives divisions.
At the same time, Siemens's mobility unit is expected to report
20% growth in orders, as a result of large orders in Finland and
Qatar, as well as a services order from Russia, according to J.P.
Morgan.
The talks between Siemens and Bombardier are taking place
against the backdrop of consolidation in the global rail industry.
China's two state-owned train makers, CSR Corp. and China CNR
Corp.—the world's largest locomotive manufacturers—merged last
month to become CRRC Corp. Just before the merger, the two
companies had a total market capitalization of around $127 billion,
according to S&P Capital IQ.
Earlier this year, the two government-controlled entities
considered a bid for Bombardier's train assets in an effort to
further increase their global presence, according to people
familiar with the matter. But CRRC said in late June that it had no
plans to buy Bombardier's train business.
Asia is the world's largest market for trains, with
rolling-stock sales averaging €28.4 billion over the past three
years, compared with €21.9 billion in Europe and €16.8 billion in
North America, according to rail consultancy SCI Verkehr.
Asian and West European train markets will grow the most in
coming years, SCI predicts.
In an effort to better serve their home market, both CSR and CNC
have been making trains through joint ventures with Western
companies, including Siemens, Bombardier, General Electric Co. and
Alstom SA, according to Maria Leenan, chief executive at SCI.
GE, which is in the process of buying Alstom's energy business,
last year opted not to acquire the French industrial group's rail
division when the two companies negotiated a takeover by GE.
Siemens, which also bid for Alstom's energy operations last
year, at the time offered to trade its rail division to Alstom as
part of any future deal. Alstom rejected that offer but a
Siemens-Alstom train tie-up remains a possibility for both European
companies, analysts say, despite the GE-Alstom deal.
Ms. Leenan of SCI said consolidation among European train makers
would allow manufacturers to recoup high development expenses
through higher sales volumes.
"It remains to be seen if the train makers merge or if they move
closer through cooperation, in which the companies specialize in
train parts which they supply to each other," she said.
Friedrich Geiger and Archibald Preuschat contributed to this
article.
Write to Eyk Henning at eyk.henning@wsj.com and Christopher
Alessi at christopher.alessi@wsj.com
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