January 22, 2020 / 12:40 PM / a month ago

Breakingviews - Alstom-Bombardier rail M&A would face faulty track

A French High Speed Train (TGV) made by French train maker Alstom waits for passengers at Nantes railway station, western France June 18, 2014.

LONDON (Reuters Breakingviews) - Henri Poupart-Lafarge clearly isn’t one for regrets. The chief executive of 10 billion euro Alstom expressed remorse for using the term “European champion” during his ill-fated hook up with Siemens’ train business, which competition authorities blocked. A potential union with Canadian peer Bombardier’s rail division, as the two sides are discussing according to Bloomberg, would create a transatlantic train-building champion instead. It will still test antitrust logic.

Faced with China’s state-backed rival CRRC, a union between the Paris-listed rail group and Bombardier’s competing division makes strategic sense. The pair could cut combined costs and invest more in high-speed train technology.

There is also a whiff of opportunism. Alstom shares have rallied by one-third over the past year, compared with a two-fifths drop at the embattled Canadian company. Analysts at AltaCorp Capital peg the enterprise value of the latter’s rail division at 4.9 billion euros, or roughly half of Alstom’s, using Bank of America estimates for the French group’s liabilities. Given Bombardier has a similar sales footprint in Alstom’s core markets of Europe, Asia and the Americas, that looks like an economic way for Poupart-Lafarge to bulk up.

Whether antitrust authorities concur is questionable. European Commission competition boss Margrethe Vestager blocked Alstom-Siemens because their high combined market share could mean higher prices for travellers. Bombardier’s 9% share of the European market is just 2 percentage points below Siemens, according to Berenberg research citing 2017 figures. Bombardier’s relative weakness in the key high-speed subsector should also mitigate risks to consumers. But the fact that the two companies would account for nearly a fifth of Europe’s rail market sales means approval is hardly a given.

Possible job cuts in Alstom’s home market further complicates matters. True, reformist French President Emmanuel Macron supported the Siemens tie-up, which targeted 470 million euros of annual cost savings, despite opposition from trade unions. Securing government assent a second time may be trickier given Macron is currently battling unions over his domestic pension reforms.

That said, the prospect of a Franco-Canadian juggernaut as a counterweight not just to the Chinese but also Siemens - which held talks with Bombardier in 2017 – would be enticing. But Alstom’s meagre 2% share price rise on Wednesday suggests shareholders have little faith that Poupart-Lafarge will be successful a second time around.

Breakingviews

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