Privatization Profits

Billions in Store for Deutsche Bahn

deutsche bahn.AFP-Getty recut
Deutsche Bahn subsidiary Arriva is big in the UK. Here, an Arriva train crosses the Ribblehead viaduct in North Yorkshire.
  • Why it matters

    Why it matters

    Deutsche Bahn needs income from the partial sell-off of Arriva and Schenker to help restructure its operations without putting its credit rating at risk.

  • Facts


    • Deutsche Bahn and the German government have reached an agreement that will pave the way for the partial sell-off of Arriva and Schenker.
    • The government has agreed to forgo the proceeds from the sale of up to 40 percent of the two units in IPOs, in exchange for sizeable dividends.
    • Deutsche Bahn needs the proceeds of up to €4.5 billion to limit debts as its restructures to boost efficiency.
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Deutsche Bahn and its owner, the German government, have reached an agreement allowing the national rail operator to keep the proceeds from the planned partial privatization of foreign transport company Arriva and logistics unit Schenker, Handelsblatt has learned.

The deal ends a dispute that was blocking the sale and had led to the cancellation of a special supervisory board meeting on the matter in early February. That meeting will now take place in April or May, company and government sources told Handelsblatt.

Deutsche Bahn, which is restructuring to fix chronic inefficiencies, plans to sell up to 40 percent of Arriva through an initial public offering on the London Stock Exchange in the second quarter of 2017. The IPO of Schenker is to follow a year later on the Frankfurt Stock Exchange. Both flotations could raise up to €4.5 billion, or $5 billion.

Deutsche Bahn’s debt has been driven up by the restructuring and investment program it launched in 2015 in response to sharp drops in revenues and earnings in the passenger and freight operations.

Deutsche Bahn needs the money to slow the rapid increase of its debt. Without the sales, total group debt would reach more than €22.4 billion in 2020, according to internal calculations. The company is worried that its credit rating could suffer and wants to keep debt below €20 billion.

The government had initially insisted that Deutsche Bahn stick to a 2008 agreement that any privatization proceeds flow into government coffers. At the time, Deutsche Bahn wasn’t paying any dividends. But at a meeting on Tuesday, the supervisory board decided on an €850 million payout for 2015, followed by an increased dividend next year. That made forgoing the privatization proceeds more palatable for Finance Minister Wolfgang Schäuble.

Deutsche Bahn’s debt has been driven up by the restructuring and investment program it launched in 2015 in response to sharp drops in revenues and earnings in the passenger and freight operations.


Deutsche Bahn Needs Money-01


Chief Executive Rüdiger Grube plans to spend billions of euros on new trains and repairing the track network, investing some €50 billion in Germany by 2020, plus an additional €5 billion abroad. But for that, he needs the cash cows Schenker and Arriva. The government had initially proposed a complete sale of the two subsidiaries but changed its mind when it realized how valuable they were to Deutsche Bahn.

The companies will provide Mr. Grube with the necessary cash flow for his investment drive. While Deutsche Bahn expects its German operations to deliver only meager revenue growth of 12 percent to just under €23 billion by 2020, Arriva and Schenker are projected to continue delivering strong growth. Deutsche Bahn’s management expects Arriva’s revenue to jump 66 percent to €8 billion by 2020. It sees Schenker expanding 19 percent to €19 billion.

Arriva is currently valued at around €4.3 billion, up from the €2.8 billion Deutsche Bahn paid for it in 2010. Financial sources estimate Schenker to be worth around €5 billion.

That explains why Chief Financial Officer Richard Lutz ruled out a complete sell-off. “We’re not going to put our two prettiest daughters up for adoption,” he said.

Restructuring costs and writedowns have pushed the group into the red for the first time since 2003. Mr. Grube will report a net loss of more than  €1.3 billion for 2015 today. Its freight business, DB Cargo, made a loss of €200 million not including special writedowns and is being reorganized to offer freight customers an increasing number of scheduled services from 2018. The aim is to cut costs by closing uneconomical loading sites.

On the positive side, Mr. Grube will be able to report the first increase in intercity passenger numbers since 2013, despite strikes and storms that disrupted services last year. Group revenue also climbed above the €40 billion level that Mr. Grube had hoped to crack long ago.

He has dropped his ambitious growth targets and is now aiming for €49 billion revenue by 2020, down sharply from an earlier goal of €70 billion. He aims to return to profit this year.


Dieter Fockenbrock is Handelsblatt’s chief correspondent for the companies and markets desk, focusing on corporate governance, opinion and rail transport. To contact the author:

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