Siemens & Alstom merge rail business in setback for Bombardier

The possible merger of two European railway manufacturers, plus the U.S. Department of Commerce' imposing duties on CSeries planes, could present major setbacks for Canadian company Bombardier. Nevertheless, Bombardier shares were up six per cent Tuesday.

Possible merger of 2 Europe railway manufacturers, U.S. duties on CSeries planes could pose big challenges

The Bombardier CS 300 performs its demonstration flight during the Paris Air Show in this June 15, 2015, file photo. On Tuesday, the Canadian company faces the possibility of new duties on the sales of its CSeries planes, in an ongoing trade dispute with U.S. company Boeing. (Francois Mori/Canadian Press)

Bombardier Inc.'s shares briefly surged more than 13 per cent Tuesday even though the transportation giant was facing bad news affecting both its commercial aircraft and railway businesses.

The Montreal-based company's shares touched an intraday high of $2.43 before losing some steam to reach $2.27, up six per cent on the day after dipping in early trading on the Toronto Stock Exchange,

Late in the day, Alstom said it had signed a merger deal with German railway manufacturer Siemens after the French government approved the transaction.

Bombardier is also believed to have talked to Siemens, so the deal with a rival is a loss for Bombardier.

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.

Ruling expected on Boeing trade spat

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 the 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."

With files from CBC News