China's top two trainmakers have been in discussions with Bombardier Inc (BBDb.TO) about possibly buying a controlling stake in the Canadian company's railway unit, two sources with direct knowledge of the matter said.
China CNR Corp Ltd (601299.SS) and state-owned CSR Corp Ltd (601766.SS), now in the process of merging to create the world's biggest railway company, are exploring a stake purchase of the Bombardier unit, complementing China's plan to sell its high-speed rail technology abroad, the sources said.
But discussions cannot move forward until after the Chinese trainmakers complete a planned $26-billion merger next month, said a person close to one of the Chinese companies.
Canada's Bombardier has been exploring a possible sale of all or part of its railway business as it seeks to pay for the huge cost overruns in its aircraft business, Reuters reported this month.
The Canadian company is working with banks on strategic options, that also include a possible initial public offering either in Germany, where the business is based, or in Britain. Bankers value a possible deal at up to $5 billion.
"I have no knowledge of this matter," said Xu Houguang, a CSR executive. Zhang Yong, an executive at CNR, also said he had no knowledge of this matter.
Bombardier spokeswoman Isabelle Rondeau declined to comment: "We will not comment on any speculation."
In February, Bombardier said it "will explore other initiatives such as certain business activities' potential participation in industry consolidation".
CNR and CSR are already the world's largest train makers by revenue but the bulk of their sales are from domestic contracts.
Yet a Chinese bid could face political opposition in Canada, which is due to hold a general election in October.
The federal government would most likely take a skeptical view of any such bid, especially if it happened during an election year, said a source familiar with government thinking. The government of Quebec, where Bombardier is based, could seek job guarantees.
A purchase of Bombardier's rail assets would "open the doors for the Chinese to all Western train markets," one of the sources with direct knowledge of the situation said.
"It would be the most concrete example of China executing on its 'one belt, one road' strategy," the source said, referring to China's aim to create a modern Silk Road economic belt through a network of infrastructure links through Central, West and South Asia to Europe and Africa.
"We believe CNR/CSR would be the most likely and viable option for the company," said RBC Capital Markets analyst Walter Spracklin in a note to clients, noting that Bombardier already has joint ventures with the two Chinese companies.
A purchase of a stake in the Bombardier unit by Chinese companies would require approval from the Ministry of Commerce, the National Development and Reform Commission and the China Securities Regulatory Commission as well as European Union, U.S. and Canadian regulators.
In February, a CNR official told Reuters that the firm was interested in buying foreign rail-linked technologies and had been in touch with some companies.
Bombardier, whose presence in China goes back to 1954, currently has a number rail joint ventures in the country, three of them with CNR and CSR units.
Shares of Bombardier rose 2.4 percent to C$2.55 on the Toronto Stock Exchange on Wednesday.
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