With China pressing, Bombardier has choice between trains or jets
• Bombardier Inc. floundered when it developed a plane to nip at the heels of Boeing Co. and Airbus SE. Now, as the company decides whether to bet its future on private jets or trains, the rail division faces a growing threat from another giant: China.
Competition from China Railway Rolling Stock Corp., the world’s largest maker of freight and passenger rail cars, is a key factor pushing Bombardier into talks to combine its train arm with Alstom SA. The French group has itself been challenged by CRRC’S move into high-speed trains.
CRRC’S ascent underscores the challenge for Bombardier as it considers selling one of its two main businesses in the face of more than US$ 10 billion in debt. The rail arm risks losing out if it doesn’t bulk up. But with an Alstom combination likely to face antitrust hurdles, the embattled manufacturer is also exploring the sale of its corporate- jet operation to Textron Inc., maker of Cessna planes.
“The Chinese keep trying again and again and it is a question of time when they will be successful with further contracts in Europe,” said Maria Leenen, founder of SCI Verkehr, a consultancy based in Hamburg, Germany.
Bombardier, which got its start building snowmobiles in Quebec in the 1930s, is facing trouble on multiple fronts. The company is in advanced talks to sell its remaining take in the Cseries, now Airbus SE’S A220 program, to the European aerospace giant, according to people familiar with the matter.
A deal could relieve the Montreal- based firm of US$ 350 million in ramp- up costs but it’s unlikely to provide it with significant funds to make a dent in its debt load, said George Ferguson, an analyst at Bloomberg Intelligence. The company sank more than US$6 billion into developing the Cseries, before ceding majority control of the program to Airbus in 2018.
Bombardier Transportation, the company’s Berlin-based train unit, has also been hit by US$ 1 billion in penalties from customers due to technical meltdowns and delivery delays on contracts from New York to London.
Beyond the immediate train troubles, China lurks.
State- owned CRRC was formed from a merger of northern and southern train makers in 2015 and its rail revenue is 21/2 times that of its nearest rival. The Beijing- based company is now moving beyond its home market to win “some significant contracts” in the U. S. while seeking to expand its presence in Europe, said Dan Fong, an analyst at Veritas Investment Research in Toronto.
At the same time, Bombardier has partnered with CRRC on projects in China and elsewhere. “China is one of the largest foreign investors in places not very familiar to Canada and some of the key emerging markets,” Guillaume Bouthillier, head of global partnerships at Bombardier Transportation, said at an event in Toronto last month.
Should a combination between Bombardier and Alstom go ahead, the new business would have annual rail sales of more than 15 billion euros ( US$ 16.5 billion), ranking No. 2 worldwide, according to SCI Verkehr. That’s well behind CRRC but comfortably ahead of Siemens AG and Hitachi.
There is “a legitimate rationale for consolidating some of the western countries companies to better compete,” Fong said.
Gaining regulatory clearance would be a major issue. A merged business would have a near 50- percent share of the market for electric multiple units and a leading position in Europe’s urban transport market, according to SCI’S Leenen, who predicts that European Union antitrust regulators would block a merger.
Talks on a Bombardier- Alstom tie- up, which Bloomberg reported on Jan. 22, are ongoing, according to a person with knowledge of the matter. Bombardier management is still discussing the details of the transaction and debating whether to proceed, the person said.
A representative for Bombardier declined to comment on the possibility of a deal at the rail or jet unit or the rise of China.
The EU already nixed a deal between Alstom and the rail arm of Germany’s Siemens AG, with which the Canadian company had previously held talks, ruling it would undermine competition in signalling and highspeed trains.
Still, analysts say Bombardier will need to sell off trains or business jets to get a grip on its debt.
“Bombardier’s only option to dig itself out from under the weight of its debt is to monetize one of its two remaining businesses,” said Cameron Doerksen, an analyst at National Bank of Canada in New York.
Ferguson at BI puts the enterprise value of the train unit at US$5 billion to US$6 billion and figures a sale of its business- jet segment could fetch US$ 4 billion to US$ 5 billion, according to a Feb. 5 report.