MONTREAL -- European railway manufacturers Siemens Mobility and Alstom announced a merger Tuesday that leaves Montreal-based Bombardier Transportation facing a substantially larger rival.
The memorandum of understanding announced Tuesday is described as a merger of equals with each owning half the shares of the new company to be headquartered in Paris. The Mobility Solutions business will be run out of Berlin.
The combined company to be called Siemens Alstom will have US$18 billion in revenues and US$1.4 billion in adjusted EBIT. Annual cost savings of US$554.2 million are expected four years after closing.
Alstom SA and Siemens AG said the two businesses are largely complementary in terms of activities and geographies.
"We put the European idea to work and together with our friends at Alstom, we are creating a new European champion in the rail industry for the long-term," stated Siemens CEO Joe Kaeser in a news release.
"This will give our customers around the world a more innovative and more competitive portfolio."
He said the global market has changed with the creation of a dominant competitor in China and digitalization.
Alstom chairman and CEO Henri Poupart-Lafarge added that the combination will bring customers and citizens smarter and more efficient systems to meet mobility challenges of cities and countries.
"By combining Siemens Mobility's experienced teams, complementary geographies and innovative expertise with ours, the new entity will create value for customers, employees and shareholders," he added.
A news conference is scheduled Wednesday morning.
The new company with 62,300 employees in more than 60 countries will have an order backlog of US$72 billion and an adjusted margin of eight per cent.
Siemens will appoint a majority of the 11 board members but Poupart-Lafarge will lead the company.
Bombardier (TSX:BBD.B) didn't immediately respond to the merger of its rivals.
Its shares closed up more than six per cent to C$2.27 in Tuesday trading even though the transportation giant was expected to face bad news affecting both its commercial aircraft and railway businesses.
The shares surged more than 13 per cent after a report out of China said Bombardier is close to signing orders for the commercial aircraft.
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 before the Siemens-Alstom merger was announced.
Doerksen added that the near-to-medium-term threat from the state-owned CRRC Chinese railway 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.
