German train maker Siemens AG is tempering expectations of an imminent deal with Bombardier Inc. to combine their rail businesses, saying it is "not in a hurry" to strike an agreement that would challenge industry colossus CRRC Corp.
Bombardier shares fell 3.8 per cent in trading Thursday to close at $2.57, their biggest one-day drop since June 21.
"In the long term, there might be an opportunity to form a real strong and powerful number two in the marketplace, which we believe is a growth market," Siemens chief executive Josef Kaeser told analysts on a conference call Thursday to discuss third quarter earnings. "But we are not in a hurry to rush to anything."
Kaeser's comments come roughly a week after Bombardier chief executive Alain Bellemare said the Canadian company continued to pursue "multiple" strategic options for its train unit. Considered together, they suggest that though the two companies are exploring a tie-up of some sort, no definitive agreement is looming.
The merger that created Chinese rail equipment giant CRRC Corp. in 2015 has shaken up the industry, forcing rival manufacturers to hone their operations and analyze whether they need partners to build scale. State-owned CRRC reported revenue of about 230-billion yuan for its first full year of operation in 2016 (about $34-billion U.S. at current exchange rates). That dwarfs that of competing train makers.
Bombardier has said repeatedly that it intends to take a pro-active approach as the consolidation unfolds. Its train business is headquartered in Berlin.
Mr. Kaeser told reporters on a separate call Thursday that antitrust authorities in Europe and elsewhere were blindsided by the Chinese merger. "Nobody noticed it," he said, according to a translation of his comments provided on the Siemens website.
"Now we've got a series of companies who have to think hard what it means; what it means for the marketplace," Mr. Kaeser said. "And surely we have to build a strong number two."
A merger between German-based Siemens and Bombardier Transportation would create a company with combined backlog of $61-billion (U.S.) with pro forma annual revenues of $16-billion and a margin on earnings before interest and taxes of about 8.5 per cent, Scotiabank transportation analyst Turan Quettawala calculated in a note published Aug.2.
The analyst said if a deal were to occur as a merger of equals, it could yield potential value accretion of 50 cents on Bombardier shares. He said regulatory approvals and Bombardier's ability to access cash flows to service its $8.7-billion long term debt are the key issues that would need to be clarified if a transaction were to happen.
It's clear that Siemens views its position as one of strength in any merger talks. Its train unit its "the industry leader by far" as measured by vertical integration and automation, Mr. Kaeser said Thursday. The company is best known for its high-speed trains and signalling systems, which have benefited from digital technology used in its other business units.
Meanwhile, Mr. Bellemare has been rebuilding Bombardier's earnings power and the train division has led the way in that effort. The unit tallied EBIT of $161-million on revenue of $2-billion in the most recent quarter ended June 30 as the order book expanded. It expects to deliver an EBIT margin of 8 per cent this year.