UK government picks Bombardier for rail contract worth US$1.6 billion

MONTREAL - Bombardier Transportation appears to have solidified the future of its British rail plant in Derby after being selected as the winning bidder in a US$1.6-billion contract to supply trains and a depot for London's transportation system.

The British government announced Thursday that it intends to award the contract to Bombardier, after a 10-day waiting period.

Under the deal, Bombardier's rail division will supply 65 trains and a maintenance depot for Crossrail that is set to open in 2018.

Bombardier (TSX:BBD.B) confirmed it has been notified of the Crossrail decision.

The trains will be manufactured and assembled at its Derby plant, a long-time centre of rail manufacturing that employs 1,600 people in design, engineering and manufacturing work.

The U.K. transportation department said the contract will support 760 manufacturing jobs and 80 apprenticeships, with about 74 per cent of the money to remain in the British economy.

Construction of the maintenance depot at Old Oak Common will support 244 jobs, plus 16 apprenticeships.

Bombardier said the contract is "a resounding endorsement" of its Aventra train that has been designed and developed in the U.K.

Analyst Walter Spracklin of RBC Capital Markets described the contract as a "nice win" that will help Bombardier to "solidify its manufacturing capabilities" within Britain.

He estimates the Canadian company's share will be around US$1 billion, based on the fact that it has pledged that 25 per cent of the value of the contract would go to small- and medium-sized suppliers.

Rival bidders were Japan's Hitachi and Spain's CAF, but Spracklin said the award to Bombardier had been widely anticipated.

"With its Derby plant, Bombardier was considered the only non-foreign bidder and we note that when Siemens pulled out of the bidding process last year, we believe Bombardier's odds of securing Crossrail improved significantly," he wrote in a report.

Bombardier lost a large Thameslink contract in 2011 to Siemens.

Benoit Poirier of Desjardins Capital Markets said that while expected, the announcement reaffirms Bombardier Transportation's "strong product offering, local presence and competitive cost structure."

The contract follows a recent award in Australia worth US$2.7 billion to supply rail cars to be manufactured in India for the State of Queensland.

The analyst said Bombardier is also the leading bidder on a US$1.39- billion Chicago Transit Authority contract expected to be awarded this summer.

"In addition, we expect Bombardier Transportation to benefit from several opportunities around the world throughout 2014, including six new projects in Mexico," he wrote.

Bombardier will report its fourth-quarter and full-year results next Thursday.

The aerospace and railway manufacturer is expected to earn 11 cents per share in adjusted profits on US$5 billion of sales in the quarter, and 37 cents per share on US$17.8 billion of revenues for the year.

On the Toronto Stock Exchange, Bombardier's shares were up six cents at C$4.19 Thursday afternoon.

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