PARIS/MONTREAL (Reuters) - France's Alstom SA ALSO.PA has agreed to buy the rail division of Canada's Bombardier Inc BBDb.TO for up to 6.2 billion euros (5.2 billion pounds) to create the world's No. 2 train manufacturer and better take on Chinese leader CRRC Corp 601766.SS.

FILE PHOTO: Trains are seen at the Alstom high-speed train TGV factory of the company in Belfort, France, February 6, 2019. REUTERS/Vincent Kessler

The cash and shares deal, announced on Monday, is the latest attempt by Western rail firms to try to build scale.

Alstom, the maker of TGV bullet trains that speed between French cities such as Paris and Nice, was blocked last year from merging with Germany's Siemens AG SIEGn.DE by European regulators, who argued the deal could penalise consumers.

The agreement between Alstom and Bombardier would unite companies with an estimated $17 billion in combined revenue.

The French firm said the two were complementary geographically, adding Bombardier’s European footprint was stronger in northern countries and the Canadian firm would add expertise in monorail trains as well as rail services.

“We don’t see it as a huge issue,” Alstom Chief Executive Henri Poupart-Lafarge said of regulatory hurdles on a conference call. “If there are some issues, they will be much easier to solve than the one we had with Siemens.”

A combination with Bombardier would give Alstom a share of between 40% and 60% of the European regional train market, according to estimates cited by union sources in France, well above Siemens at 10% to 20%.

But some analysts have said there could be less opposition to a deal this time as Alstom and Bombardier have a lower combined European market share in high-speed rail and signalling.

The companies have informally briefed EU antitrust regulators on the deal, according to sources familiar with the matter.

The French government, which had criticised the EU’s veto on the Siemens merger, welcomed the transaction.

“This deal will allow Alstom to prepare for the future, against the backdrop of increasingly intense international competition,” Finance Minister Bruno Le Maire said, adding he was due to discuss it with the EU’s antitrust boss, Margrethe Vestager, on Tuesday.

Bombardier and Alstom said they expected the deal to close in the first half of 2021. Their agreement includes a 75 million-euro break fee.

DEBT-LADEN BOMBARDIER

Train makers are eyeing consolidation to reduce costs and improve thin rolling stock margins, and Alstom said it also wanted to make the most of a boom in rail travel as consumers switch from planes for environmental reasons.

The merged group would be able to reach annual cost savings of 400 million euros from the fourth year, the company added.

Under the deal, one of the Bombardier rail division’s shareholders, Canadian pension fund Caisse de depot et placement du Quebec, would become the lead investor in Alstom with an 18% stake.

French telecoms-to-construction conglomerate Bouygues would retain around 10% of Alstom, which said it would finance the transaction by raising equity and with debt. The final price will be between 5.8 billion and 6.2 billion euros, it said.

The deal gives Bombardier’s rail unit an enterprise value - equity plus debt - of $8.2 billion, which would allow the Canadian firm to pay down some of its $9.3 billion in debt.

After closing, Montreal-based Bombardier would emerge as the only large pure business jet maker, with a focus on expanding aftermarket sales and margin expansion.

Aerospace analysts cautioned that the loss of rail’s stable contracts would create greater risk for Bombardier in the event of a market downturn.

General Dynamics Corp GD.N, parent company of Bombardier's U.S. rival Gulfstream, generates revenue from military sales in addition to business jets, as does France's Dassault Aviation AVMD.PA.

Bombardier has shed businesses after facing a cash crunch in 2015 while bringing a new plane to market. The Alstom deal comes days after it sold its stake in the A220 passenger jet programme to Airbus AIR.PA.

It has also been struggling to contain higher rail costs generated by problematic contracts in its nearly $36 billion order backlog, which Alstom said it would look to fix.

“Clearly I would have preferred for things to have turned out differently for Bombardier,” Quebec’s premier, François Legault, said, adding Caisse’s presence in Alstom’s capital was a comfort for Canadian interests.

Bombardier Transportation is headquartered in Berlin and has plants worldwide including at Derby in central England, Mannheim in Germany and Crespin in northern France.

Alstom’s Poupart-Lafarge said the acquisition would not affect jobs.

SIEMENS ON ITS OWN

A previous flirtation between Siemens and Bombardier to combine some train businesses fell apart in 2017.

A source close to Siemens said there was no sign the firm was planning any type of counterbid, given EU regulators’ tough stance on its previous attempts.

Germany’s IG Metall union called on the German government to look at the matter and raised concerns about an Alstom-Bombardier deal, saying it “would not accept any consolidation at the expense of Germany” should EU regulators allow this combination. State-owned Deutsche Bahn is a big customer of both firms.