Will Bombardier Inc. Sell its Train Business to the Chinese?

Chinese state-owned enterprises may have interest in Bombardier Inc.’s (TSX:BBD.B) train business. How should investors react?

| More on:
The Motley Fool

Not much has gone right for Bombardier Inc. (TSX:BBD.B) in the past few years. Of course, its biggest problem has been the CSeries jet, which has been plagued by delays and soaring costs. As a result, the company had over US$7 billion in debt at the end of 2014.

A few steps have been taken to shore up the balance sheet. It raised over US$2 billion in debt and another $1.1 billion in equity. Its Learjet 85 program was suspended indefinitely. Finally, the company is considering a sale of its train business, Bombardier Transportation (BT). This last step has made some investors very optimistic. After all, BT could fetch around US$5 billion, more than Bombardier’s market capitalization.

And on Wednesday both Reuters and Bloomberg reported that Chinese state-owned companies CSR Corp. and China CNR Corp. are looking closely at BT. So, what exactly does this mean?

The story

According to an unnamed source, CNR and CSR are considering acquiring a controlling stake in BT. Such a transaction wouldn’t take place until after CNR and CSR complete their previously announced merger.

Buying BT would be very helpful to CNR and CSR (both state-owned companies). They are already the world’s largest train makers by revenue, but derive most of their business from domestic contracts. BT would give the combined company access to other markets all over the world.

All sorts of hurdles

Personally, I don’t see such a transaction being allowed to go through. The politics simply don’t work.

Let’s start with the Quebec government, which has a very close relationship with Bombardier. In February Economy Minister Jacques Daoust even said the province was ready to bail out Bombardier should the company run into further financial trouble. And there’s no way Quebec would favour such a transaction. It didn’t even allow Rona Inc., a struggling home-improvement chain, to be bought by American competitor Lowe’s.

The Canadian government may also have a problem. It’s blocked the Chinese before, and an election is coming up in October. Frankly, I don’t see the Conservative government even considering this.

Furthermore, BT is actually headquartered in Germany, and the German government may have a problem with this.

How should you react?

Frankly, I don’t see this news as significant—the Chinese simply won’t be allowed to buy BT.

With that said, I think it’s a good idea to avoid Bombardier at this point. There are simply too many problems with the CSeries, and the stock could fall further as a result.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. David Gardner owns shares of Lowe's.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »