Siemens likely to pick Alstom for rail merger - sources

By Alexander Hübner, Georgina Prodhan and Gwenaëlle Barzic

MUNICH/FRANKFURT (Reuters) - German industrial group Siemens is likely to decide on Tuesday to pursue a multibillion-dollar rail merger with French rival Alstom rather than Canada's Bombardier , two sources familiar with the matter told Reuters.

The three major train and rail technology groups active in Europe have been looking at combining their businesses as larger Chinese state-backed rival CRRC embarks on a global expansion drive.

"I think Alstom will make it," one of the people said on Monday. The second person said Siemens' supervisory board would decide the matter on Tuesday, also describing Alstom as the frontrunner.

Siemens, Alstom and Bombardier declined to comment.

Siemens and Alstom are strong in high-speed intercity trains with their ICE and TGV models. Siemens is also the leader in signalling technology, while Bombardier - whose transportation headquarters are in Berlin - is stronger in commuter and light-rail trains.

The Franco-German deal would come just as plans by German Chancellor Angela Merkel and French President Emmanuel Macron for closer integration may be undermined by Merkel's weak showing in Sunday's national election.

It would also represent a reconciliation of sorts between Siemens and Alstom, which snubbed the German company in 2014 to sell its energy division to General Electric in a deal that also saw Paris take a 20 percent stake in Alstom, under a temporary agreement with construction group Bouygues .

Siemens Mobility is expected to be merged into Alstom, in which Siemens would hold 50 percent plus one share, while the chief executive would be Alstom's current boss Henri-Poupart Lafarge.

"It's important for French authorities that the terms are balanced, that includes the role of CEO," a source familiar with the matter said.

The non-executive chairman will be appointed by Siemens, another source close to the matter said. The accord will also include a 4-year commitment on job retention, the same source said.

The combined business would have sales of about 15 billion euros ($18 billion). That compares with CRRC's sales of 230 billion yuan ($35 billion) and market value of $40 billion.

The French state will not use its option to buy 20 percent of Alstom from Bouygues as part of a deal to facilitate the sale of Alstom's energy business to General Electric , two sources close the matter said.

The option deal, signed in 2014, allowed the French state to purchase 20 percent of Alstom from Bouygues for a period of 20 months. It will expire in October.

This means Bouygues will become Alstom's number one shareholder again with a 28.3 percent stake. Its board will meet on Tuesday, a source close to the matter said.

BLOW TO BOMBARDIER

The tie-up would be a blow for planes-and-trains maker Bombardier, which faces a separate battle this week to protect aerospace jobs in Quebec and Northern Ireland amid a subsidy row with Boeing .

Sources have told Reuters that Siemens sees Alstom as financially more stable than Bombardier, which also would have wanted to have control over a transportation joint venture - something Siemens was reluctant to cede.

Bombardier shares fell sharply on Friday after a report that Siemens was in advanced talks with Alstom.

Any combination of the three would carry considerable regulatory risks, said competition lawyer Martin Gramsch of Simmons & Simmons, adding they would likely argue for the market to be considered globally to take into account the competitive threat from CRRC.

"The market for larger jets has been defined as a world market. But, for trains, markets have traditionally been described as national or European because of the different requirements such as gauges and voltages," he told Reuters.

"A broader definition would make it easier for the parties."

France is not worried about an anti-trust review of the merger, even though it could bring some "technical adjustments," a source familiar with the matter said on Monday.

Siemens' shares were up 0.2 percent by 1350 GMT on Monday, while Alstom's were up 0.8 percent.

(Additional reporting by Maya Nikolaeva, Tim Hepher, Gwenaelle Barzic, Jean-Baptiste, Cyril Altmeyer Vey in Paris and Allison Lampert in Montreal; Editing by Arno Schuetze, Victoria Bryan, Mark Potter and Jane Merriman)