French train maker Alstom (PA:ALSO) has confirmed it is in talks on the possible acquisition of the train business of Canada’s Bombardier (TO:BBDb), a potential $7 billion deal that could help it build scale in the increasingly competitive rail sector.
A deal could be important for Alstom, maker of the TGV bullet trains which speed between French cities such as Paris and Nice, as it looks to compete with China’s CRRC Corp (SS:601766), the world’s largest train maker.
Alstom was blocked last year by European regulators from merging with Germany’s Siemens (DE:SIEGn).
“Alstom confirms being in discussions with Bombardier regarding a possible acquisition of Bombardier Transportation … No final decision has been made,” Alstom said in a statement on Monday.
A source familiar with the matter had told Reuters on Sunday that Alstom was close to agreeing to buy Bombardier’s train business in a deal giving the unit a value of $7 billion on an enterprise basis combining equity and debt.
Alstom shares were up 1.9% by 0855 GMT.
Train makers are eyeing consolidation to reduce costs through scale and improve thin rolling stock margins as they face competition from CRRC.
An Alstom acquisition of Bombardier Transportation, which is headquartered in Berlin and which has plants worldwide including at Derby in the English midlands and at Mannheim in Germany, would likely attract antitrust scrutiny, though some analysts have said there could be less of a regulatory barrier to a deal since the pair has a lower European market share in high-speed rail and signaling.
The French government, which had criticized the EU’s veto on the Siemens merger, is looking on the deal with Bombardier with a favorable eye and expects less EU resistance, a source familiar with the government’s thinking said.
European regulators had argued the Alstom-Siemens deal could have hurt competition and led to higher prices for consumers despite concessions made buy the companies.
A potential agreement with Bombardier would unite companies with an estimated $17 billion in combined revenues.
Deutsche Bank (DE:DBKGn) analysts said in a note that a takeover of Bombardier’s rail division would be accretive to Alstom’s earnings per share by around 17 percent.
A deal would also follow Bombardier’s decision last week to sell off its stake in the A220 passenger jet program to Airbus (PA:AIR) and the Quebec government.
Bombardier has been struggling to contain higher rail costs generated by problematic contracts in its nearly $36 billion order backlog.
The Canadian group has been shedding businesses to improve its financial position after it faced a cash crunch in 2015 while bringing a new plane to market. Bombardier has $9.7 billion in outstanding bonds, according to Refinitiv data.