Europe's `Railbus' Seen Winning Antitrust Nod Amid China Threat
(Bloomberg) -- With historic factories located deep in the European heartland, and billions of dollars worth of contracts with local train operators, Siemens AG and Alstom SA are big players in the region’s rail-equipment market. Yet they’re expected to win antitrust approval for their planned merger -- with some strings attached.
The tie-up -- which has earned the moniker ‘Railbus’ after the planemaker Airbus -- is justified by the companies, and the German and French governments, as a way to create a European champion to take on Chinese behemoth CRRC Corp., the world’s largest maker of rail rolling stock. Alstom said Tuesday it will start seeking approval from authorities for the planned deal in March.
“There’s certainly a macro-economic and political dynamic which suggests that this deal is more likely to get through than not,” said Peter Alexiadis, a lawyer at Gibson Dunn & Crutcher in Brussels, who isn’t working for either company. The battleground will be in the “fine print.”
Alexiadis and other analysts suggest the future threat posed in the region by CRRC will sway the European Union competition watchdog, as long as the German and French companies agree to so-called remedies, such as asset sales, to alleviate some antitrust issues.
Siemens and Alstom’s biggest customers are governments and state-owned rail operators, mostly in Europe. The former bitter rivals make high-speed trains that criss-cross countries like France, Germany and Spain in addition to subways and regional railways. With combined sales of 15 billion euros ($18 billion), the merged company will remain behind CRRC, but leapfrog Canadian rival Bombardier Inc. for the top spot in Europe.
“Things are moving smoothly, in line with our expectations,” Alstom CEO Henri Poupart-Lafarge told analysts Tuesday. The company is in talks with unions and should sign a business combination agreement by March, which will trigger the start of a formal antitrust process. He reiterated the deal unveiled in September will take about 12 months to close.
The question is whether the European Union’s competition authority will look more narrowly at the regional market, where CRRC has only a marginal presence so far, or consider the global rail-equipment market. Last year, CRRC signed a deal to supply three electric trains to the Czech Republic, its first contract with an EU member, two years after signing a similar deal with Macedonia. CRRC has also supplied electric locomotives to Serbia and it’s been in talks to acquire the Czech Republic’s Skoda Transportation AS, according to a June report by China Daily.
While the Chinese company is planning to expand further in Europe in the next few years, it currently gets only 8 percent of its total sales from outside China. That didn’t stop the French and German government backers of the European deal from seizing on CRRC’s future prospects. Economy Minister Bruno Le Maire of France has argued that the Chinese company is “four times bigger than Alstom” alone and poses a serious threat to the industry. His German counterpart has called the deal an “opportunity” in the face of tough international competition.
Their argument looks set to prevail. “Regulators are likely to consider future competition,” said Aitor Ortiz, an analyst at Bloomberg Intelligence. “CRRC currently has a limited presence in Europe, but it’s twice as big as Alstom and Siemens combined.”
To win approval for the deal, a “cocktail of behavioral and structural remedies” might be needed, Alexiadis said.
When it comes to rolling stock, Siemens and Alstom don’t have much overlap, according to Maria Leenen, chief executive officer of German rail consultancy SCI Verkehr. Issues will arise for their signaling system operations, possibly opening a door for French rival Thales SA, which has said it wants to grow its own signaling business. Bombardier could also be interested in any assets put up for sale.
“It’s a very political deal and it’s quite clear that they’ll pass,” she said, adding that the companies likely already have a strategy for “how to deal with the signaling segment.”
The merger could also hurt smaller rivals by squeezing them out of joint bids for big orders, according to Bloomberg’s Ortiz. The European Commission may seek pledges from Siemens and Alstom to keep partnering with some small firms or license products to them.
Siemens and Alstom are aiming to surf a recent change in political sentiment in favor of European tie ups. A recent European Commission proposal for screening foreign investment into the region and protecting companies from hostile takeovers signals a shift toward more protectionism, Ortiz said. The rail deal also comes amid other regional combinations such as the purchase of Germany-based carmaker Opel by France’s PSA and talks between French and Italian naval groups.
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