Siemens-Alstom deal

Training sights on China

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All change. Source: DPA

Like a high-speed express train, the merger of Siemens’ rail business with French counterpart Alstom was seen long before it reached the station. But that didn’t detract from its determination as the two rivals eased up to the same platform on Tuesday evening. “We need to strengthen our ability to compete. A dominant player in Asia has changed global market dynamics,” said Siemens CEO Joe Kaeser in a video announcing the tie-up.

The deal, which will see the creation of Europe’s largest rail firm with €15 billion ($17.6 billion) in turnover, is aimed at addressing the threat posed by China Railway Construction Corporation. Beijing’s state-controlled giant has been ratcheting up the pressure on its European rivals since it was formed in 2015. Its revenue topped €30.5 billion last year, and its lower cost base poses a genuine threat to European manufacturers: a Siemens-built high-speed train costs around €40 million, but CRCC can make one for just €19 million.

Siemens, which makes Germany’s ICE high-speed trains, and Alstom, producer of the famous French TGV, are hoping they can push the Chinese onto a siding. The companies already sell light-rail vehicles to Seattle, metros to Bangkok and trains to Dubai, and employ 62,000 people. If successful, the merger would follow the model of plane maker Airbus, a Franco-German initiative established in the 1970s.

Siemens will merge its entire rail division, Siemens Mobility, and a smaller specialist unit with the French company, taking a stake slightly above 50 percent in the merged company. The new name will be Siemens Alstom, headquartered and listed in Paris. Alstom’s CEO Henri Poupart-Lafarge will remain CEO, with a Siemens appointee chairing the supervisory board. In 2014, Alstom sold its non-rail businesses to General Electric and now focuses entirely on trains, subway cars, trams and signaling and track equipment. Mr. Kaeser had also been negotiating with Canadian train and plane maker Bombardier, but that deal is now off the table.

Already Alstom and Siemens are aiming for joint revenue of more than €20 billion by 2023 while increasing the merged operating profit margin, adjusted for one-off items, to between 11 percent and 14 percent that same year — last year it was 8 percent. The deal should lead to annual savings of as much as €470 million four years after closing, in part, Mr. Kaeser admitted, by firing overlapping workers and eliminating redundant activities.

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Ironically, Siemens and Alstom bear partial responsibility for creating China’s train titan. The Chinese gained know-how in their home market because Siemens, Alstom, Bombardier and Japan’s Kawasaki were forced to transfer technology in joint ventures with Chinese firms over the past two decades. CRCC and other Chinese firms now build trains without outside assistance and export to the United States, India and Australia, competing with established Western players.

The Chinese firm is currently completing a takeover of the Czech train manufacturer Skoda after previously only scooping up smaller European firms such as German parts supplier Bochumer Verein. Skoda will be CRCC’s largest prize to date and the Chinese company is thought to covet Skoda primarily for its detailed knowledge of the European regulatory environment.

For Mr. Kaeser, who has long stressed the strategic need for a strong global number two to CRRC, there’s no looking back. The 60-year old wants to turn Siemens, which makes everything from wind turbines to medical scanners, from an unwieldy oil tanker into a fleet of fast ships. Siemens is increasingly becoming a holding company, breaking up a conglomerate which Werner von Siemens founded in 1847 with the invention of a new telegraph.

Siemens’ wind division has already been merged with the Spanish company Gamesa and floated on the stock exchange. Medical technology unit Healthineers will be spun off next year, and sources have told Handelsblatt that Siemens also has an option to sell its stake in Valeo-Siemens, a maker of electric engines, in December 2021.

Siemens Mobility has for many years struggled to deliver profits, but has recently upped its performance, now enjoying an operating profit margin of 8.7 percent. Unions, however, regard any merger or spin-off with skepticism, fearing a loss of influence and jobs. “Breaking up the company any further is risking the brand and the company,” Jürgen Kerner and Birgit Steinborn, leading labor representatives at Siemens, said recently. But support has been secured for the rail business spin-off: employees will not lose their jobs in the coming four years.

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The deal still needs approval from Alstom’s shareholders, which will receive two special dividends, and European competition authorities. “Especially in the area of high-speed trains the parties could encounter problems when antitrust regulators opt for a narrowly defined, regional market,” competition lawyer Martin Gramsch of law firm Simmons&Simmons told Handelsblatt.

The companies will argue that the EU’s anti-trust authority – the European Commission – should not look at the European market in isolation, saying the train market is now worldwide, and a global counterweight to CRRC is needed. French sources suggest there should be no political problems with any merger, with both the French and German governments keen to see European consolidation.

Shareholders already seemed to have approved the deal, sending up the share prices of both Siemens and Alstom. It’s another vote of confidence for Siemens CEO Mr. Kaeser, who has presided over a 50 percent increase in share price since he took the helm in August 2013.

 

Axel Höpner is Handelsblatt’s Munich bureau chief. Thomas Hanke is Handelsblatt’s correspondent for France. Handelsblatt’s Dieter Fockenbrock covers the transport industry. Gilbert Kreijger is an editor with Handelsblatt Global. To contact the authors: fockenbrock@handelsblatt.com, hanke@handelsblatt.com, hoepner@handelsblatt.com and kreijger@handelsblatt.com

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