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Alstom Enters Biggest Deal to Help Alstom Deal with Growing Threat from Chinese Competitor.

On Monday, the French train manufacturer said it had signed an agreement to acquire Bombardier’s rail business in the amount of €5.8 billion ($ 6.3 billion) to €6.2 billion ($ 6.7 billion).

Alstom and Bombardier agreement to unite companies with combined revenue of $ 17 billion.

Alstom shares dropped 4.4% on Tuesday at the start of the trading session.

«We believe the stock will now trade in a limited range amid capital increases and uncertainty over the course of a lengthy antitrust process.», – written by JP Morgan analysts, who lowered their forecast for Alstom from «overweight» before «neutral».

The acquisition, which will be paid for through a combination of cash and shares, will improve «Global coverage» Alstom and its ability to respond to the growing demand for «sustainable mobility», especially in Europe.

The combination with Bombardier would give Alstom a 40-60% share of the European regional rolling stock market, as estimated by union sources in France, significantly higher than Siemens (10-20%).

Alstom and Bombardier, which are looking to reduce their debt burden as we approach the end of the five-year term, previously confirmed the talks following a report from the Wall Street Journal..

The Canadian company says the deal will allow it to focus exclusively on the aviation business..

The deal marks Alstom’s second attempt to create a European rail company that can compete with giants like the China Railway Rolling Stock Corporation (CRRC), the world’s largest supplier of rail equipment..

According to Maria Leenen, CEO of SCI Verkehr, a strategy consultant focused on railways and logistics, the deal between Alstom and Bombardier could create «European leader», necessary for the block to compete in the global railway industry.

Last year, EU regulators blocked a deal to merge train businesses Alstom and its German rival Siemens over concerns that the merger would raise prices for signaling systems and next-generation high-speed trains..

Some analysts say there may be less opposition to the deal this time around as Alstom and Bombardier have a lower combined share of the European high-speed rail and signaling market..

According to sources familiar with the matter, the companies informally informed the EU antitrust authorities about the deal..

«As the European Commission only recently reviewed the transport segment of the market at the heart of the Siemens-Alstom deal, Alstom believes that (the Commission) already knows the subject well and therefore expects faster approval.», – Credit Suisse analysts say, keeping «neutral» rating on company shares.

The proposal allows comparisons to be made with the Airbus concern, which dates back to the consolidation of several European aircraft manufacturers in the 1970s, creating a structure that helps it compete with American rival Boeing. The railroad companies argued that joining forces was necessary to cope with «growing competition from non-EU companies».

CRRC is a key global competitor for the entire industry. The China State Railway Company reported that in 2018, its revenue amounted to almost €21 billion ($ 23 billion) compared to €15.3 billion ($ 16.6 billion) recorded by rail divisions Alstom and Bombardier, according to SCI Verkehr.

The Chinese company has openly announced its plans to export even more railway products and has already surpassed the price of competitors for the supply of passenger cars in Boston, Philadelphia, Chicago and Los Angeles..

Last year, the company strengthened its position in Europe with the purchase of the German railway company Vossloh, which specializes in the production of diesel locomotives. German authorities are still reviewing this deal.

Two railroad giants unite to counter Chinese hegemony

Linen said that while China’s presence in Europe is still «too little to count», CRRC moves to the European continent with strong political support from the Chinese state.

She also warned that the proposed deal between Alstom and Bombardier could  face challenges from the antitrust authorities, given that together the companies supply almost 50% of the regional passenger trains in Europe.

SCI Verkehr expects demand for these trains to increase over the next five to ten years as Europe seeks to reduce its carbon footprint.

Some problems may be hidden for now. «I expect Alstom to take into account the risk of underinvestment in factories, low margin contracts and potential third party claims» against Bombardier Transportation, Linen said, citing Deutsche Bahn’s refusal to accept 25 new intercity trains due to «technical defects».

The German state-owned railway company Deutsche Bahn is a major customer of both firms.

«Alstom aims to restore the full operational and profitable potential of Bombardier Transportation», – the company said in a statement. They said they expect the acquisition to generate cost savings and increase profits..

Unions may also be concerned that the merger could lead to plant closures and job cuts, she added..

Alstom CEO Henri Poupart-Lafarge said on Monday the acquisition would have no impact on jobs and said he was confident in getting antitrust approval.

French unions issued a statement on Monday saying the Alstom-Bombardier deal should not result in serious job losses in France.

German trade union IG Metall has called on the German government to consider the matter and raised concerns about the deal, saying that «will not accept any consolidation at the expense of Germany», if EU regulators allow such a combination.

Bombardier and Alstom expect deal to close in first half of 2021.

Two railroad giants unite to counter Chinese hegemony

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