Turbulent Tuesday: Bombardier faces prospect of bad news for aerospace, railway businesses
The first hit could come from Europe, where Siemens and Alstom expect to get clearance for a merger; another blow may originate from the U.S. with the Department of Commerce set to decide on preliminary CSeries duties
MONTREAL—Bombardier seems headed towards a double barrel of bad news Tuesday with the potential to affect its commercial aircraft and railway businesses.
The first hit is coming from Europe, where multiple media reports say the French government has approved the merger of Alstom with German railway manufacturer Siemens.
The Financial Times reported that a transaction could be announced by the two companies as soon as Tuesday, citing people involved in the talks.
The paper said the deal, which would signal a shift in France’s industrial policy to creating European champions, would see Siemens owning half of the new company.
Alstom acknowledged on Friday that it was in talks with its rival about a possible merger. Bombardier is also believed to have talked to Siemens.
The industry is undergoing consolidation to compete with the state-backed rival Chinese railway manufacturer CRRC that is growing its global reach.
The merged European powerhouse with about US$18 billion in revenues would be the largest global player in the higher margin signalling business.
However, 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.
Doerksen said Siemens-Alstom would face significant overlap, which could take many years to address.
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.
Doerksen added that the near-to-medium-term threat from China 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.
The other piece of bad news for Bombardier could come from Washington, D.C., when the U.S. Department of Commerce announces its decision on imposing preliminary countervailing duties on sales of CSeries planes.
The Trump administration is widely expected to back Boeing’s petition. However, no duties will be paid until Bombardier delivers the first planes to Delta Air Lines next year.
A preliminary anti-dumping determination is currently scheduled to be announced Oct. 5, but can be extended. The department will make final determinations on duties before the U.S. International Trade Commission issues its final injury determination.
Bombardier has said it is confident that in the end ITC “will reach the right conclusion.”
The process could take months to complete while hefty duties would undermine Bombardier’s efforts to sell CSeries planes directly to U.S. airlines.
Doerksen said he believes Bombardier will win additional CSeries orders that will “mitigate the anxiety around the Boeing trade dispute.”
Bombardier’s stock price has dropped 22 per cent since early August and lost five cents or 2.3 per cent at $2.09 in Tuesday morning trading on the Toronto Stock Exchange.