By Pamela Barbaglia, Allison Lampert and Gwénaëlle Barzic
LONDON/MONTREAL/PARIS (Reuters) - Bombardier <BBDb.TO> has approached France's Alstom <ALSO.PA> and Japan's Hitachi <6501.T> to find a merger partner for its rail business as it struggles to contain costs that have eaten into margins, sources told Reuters.
The Canadian manufacturer of planes and trains is working with Citigroup <C.N> and UBS <UBSG.S> to strike a deal that could help create a rail champion to better compete with China's state-backed operator, CRRC.
Rail companies are eyeing consolidation to reduce costs through scale in a market dominated by CRRC, the world's largest train maker.
Bombardier has seen its share price plunge 37% since the start of the year after it flagged a 2019 profit warning on Jan.16.
It has been reviewing several rail merger scenarios in recent months which also involved a possible deal with Germany's Siemens <SIEGn.DE> and a Chinese counterpart, but these options failed to gain traction, one of the sources said.
It remains in active talks with Alstom, one of its closest rivals in Europe, while also looking at Hitachi as another merger option, the sources said, requesting anonymity as the matter is confidential.
Bombardier, Alstom, Hitachi and Siemens all declined to comment.
Discussions with French industrial group Alstom began in July and became serious in September, one of the sources said.
The French government is open to a rail deal for Alstom but no final decision has been made on the terms of a potential transaction, another source said.
Alstom, advised by Rothschild, was only recently involved in a similar rail merger with Siemens - a deal set to create a European rail powerhouse but subsequently halted over antitrust concerns.
Berenberg analysts said that there would be less of a regulatory barrier to a deal between Alstom and Bombardier since the pair has a lower European market share in high-speed rail and signaling.
Japanese conglomerate Hitachi was also approached last year, the sources said, but it was not immediately clear whether the talks are still ongoing.
Hitachi's biggest rail market in Europe is Britain where there is little overlap with Bombardier's operations.
Yet both companies are active in Germany where concentration may raise concerns among European authorities, one of the sources said.
Bombardier's selection of its preferred merger partner will ultimately hinge on the likelihood of winning antitrust approval and the remedies that can be offered to soothe competition concerns, the sources said.
European regulators are set to review two-decade old rules that determine if companies have the market power to hammer rivals - a move that could help Bombardier win consensus for its rail deal.
Bombardier sold 30% of its rail business to Canada's second-largest pension fund, Caisse de depot et placement du Quebec, in 2015 after reviewing strategic options including a possible listing in Germany or Britain.
However, the unit has since struggled to cope with a handful of problematic rail contracts which have eaten into its margins, leading Bombardier to issue a profit warning for 2019.
The company recently slashed its guidance for its fourth-quarter earnings due to delays in business jet deliveries and higher rail costs.
The plane-and-train-maker, which has $9.7 billion in outstanding bonds according to Refinitiv data, faces growing pressure to quickly raise money from its transport unit, one of the sources said.
"They are serious about this. Without a deal the outlook is bleak," he said.
(Reporting by Pamela Barbaglia in London, Allison Lampert in Montreal and Gwenaelle Barzic in Paris; Additional reporting by Alexander Huebner in Munich; Editing by Susan Fenton)