On 26 September, the two largest rolling stock manufacturers in Europe, Alstom and Siemens, announced the signing of a Memorandum of Understanding on the merger between the French company and Siemens’ Mobility Division, based on “equality” principles. The transaction seen by both parties as “a perfect match” will form the new joint venture that will “successfully” approach all mobility challenges worldwide.
The two companies estimate that the transaction will be completed by the end of 2018 and the new company, called Siemens Alstom, will begin its activities. Under the deal, Siemens will own 50 percent plus a few shares within the new company, while Alstom’s CEO, Henri Poupart-Lafarge will lead the joint venture and will be member of the Board of Directors.
“We are going to bring together our mobility businesses of both companies and we are going to bring it to the next level, together. This is a merger of equals in a spirit of a strong partnership. Siemens will receive some 50 – 50 plus percent of the new company. By the end of 2018, we expect the closing of the transaction and we will start our mobility business at European, as well as global level,” Joe Kaeser, CEO of Siemens AG, said, during the joint press conference.
The Board of Directors of the new group will include 11 members of which 6 directors named by Siemens (one of them will also be the Chairman), the CEO and four independent directors. Henri Poupart-Lafarge will continue his tasks as CEO of the joint-venture, while Jochen Eickholt, Siemens Mobility’s current CEO, will also have an important position within the new entity.
Global headquarters as well as the management team for rolling stock will be in Paris area and the combined entity will remain listed in France. Headquarters for the Mobility Solutions business will be located in Berlin, Germany. In total, the new entity will have 62,300 employees in over 60 countries.
“Today is a key moment in Alstom’s history, confirming its position as the platform for the rail sector consolidation. Mobility is at the heart of today’s world challenges. Thanks to its global reach across all continents, its scale, its technological know-how and its unique positioning on digital transportation, the combination of Alstom and Siemens Mobility will bring to its customers and ultimately to all citizens smarter and more efficient systems to meet mobility challenges of cities and countries,” Henri Poupart-Lafarge, CEO of Alstom said.
The transaction
The new entity will benefit from an order backlog of EUR 61.2 billion, revenue of EUR 15.3 billion, an adjusted EBIT of EUR 1.2 billion and an adjusted EBIT-margin of 8 percent, based on information extracted from the last annual financial statements of Alstom and Siemens. Within the combined setup, Siemens and Alstom expect to generate annual synergies of EUR 470 million latest in year four post-closing and targets net-cash at closing between EUR 500 million and EUR 1 billion.
As part of the combination, Alstom existing shareholders at the close of the day preceding the closing date, will receive two special dividends: a control premium of EUR 4.00 per share (in total = EUR 900 million) to be paid shortly after closing of the transaction and an extraordinary dividend of up to EUR 4.00 per share (in total = EUR 900 million) to be paid out of the proceeds of Alstom’s put options for the General Electric joint ventures of approximately EUR 2.5 billion subject to the cash position of Alstom. Siemens will receive warrants allowing it to acquire Alstom shares representing two percentage points of its share capital that can be exercised earliest four years after closing.
Bouygues, one of Alstom’s shareholders, fully supports the transaction and will vote in favor of the transaction at the Alstom’s board of directors and at the extraordinary general meeting deciding on the transaction to be held before July 2018, in line with Alstom board of directors decision. The French State also supports the transaction based on undertakings by Siemens, including a standstill at 50.5 percent of Alstom’s share capital for four years after closing.
In France, Alstom and Siemens will initiate Works Councils’ information and consultation procedure according to French law prior to the signing of the transaction documents. If Alstom were not to pursue the transaction, it would have to pay a EUR 140 million break-fee.
A perfect match
Before the Alstom deal, Siemens has carried a series of analyses for a potential merger and the international press has even referred to potential negotiations with Bombardier Transportation, as well as Alstom, which has given the German company two possibilities to sign a merger for a new joint-venture. Although, last summer the press quoted sources close to negotiations declaring that a merger with Bombardier was possible, the two companies had no official position and Bombardier declined any comments.
However, by evaluating the market, Siemens was trying to sign a merger in the rail industry, as the fusion of the two large Chinese companies (CNR and CSR creating CRRC) had significantly changed the market structure and the resulted Chinese company had reached a dominant position. Asked about the potential fusion with Bombardier, Joe Kaeser, CEO of Siemens AG said negotiations had not failed, but instead closer analyses about potential mergers had been carried out and Alstom had been the best choice. “We’ve been looking at these topics for a long time because the rail industry has accelerated, the two biggest players in the rail industry have merged, creating a dominant force in the global industry. And that, by itself, has increased a strategic importance of economics’ scale. We have been carefully analyzed what would be the best fit. Best fit for customers, the best fit for Europe, the best fit for our employees, and also for our shareholders in a long term. The outcome of the analysis has clearly been Alstom. Alstom is the best fit. And, at this time, the timing is right,” Joe Kaeser, CEO of Siemens AG, said.
This merger option was also confirmed by Alstom, after results of internal analyses and all the parties from the company involved in the process concluded that the merger with Siemens Mobility is a perfect match and in line with Alstom’s strategy. “For Alstom, this is the best merger that we could ever thought about. When we came to this opportunity to create this new global leader, and when we did the internal review and we were looking internally what was the best fit for Alstom, Siemens was the first. This is no do-or-die type of merger, but this is one that cannot be missed, that both companies dreamed about during a long period. The transaction was so fast, because the ground it was there already and the basic analysis and understanding that this was a deal to be done”, said Lafarge.
Lafarge explained that market development relies on two tendencies: globalization and digitalization. Globalisation is what creates opportunities, while increasing competitiveness and the number of competitors, such as Chinese, Japanese or Korean companies. Under the circumstances, it is necessary to allocate massive investments to be present in the market on all continents.
In turn, in order to approach digitalisation, strong, quality and innovative technologies are required, and most cities and countries tend to develop their transport systems by implementing digital solutions in order to face new mobility challenges and increase urbanisation. “The digitalisation of the market means we need to have strong technologies. We are two very innovative companies, but it requires a lot of investment and expertise. These are the two busy trends on our market and this explains why the match between Siemens and Alstom is a perfect one,” Lafarge explained.
The complementarity will tackle transport challenges
As global population is expected to reach 9.7 billion by 2050, 70% of which will live in urban areas, it is essential to encourage sustainable transport to meet future requirements of efficient mobility. Increasing urbanisation also alters the transport market structure, as public transport will require revolutionary products and solutions. At the same time, the geographic position will also have an impact on the development of the industry and on entering new markets.
An important element of this merger is the complementarity of the companies in terms of activities and the geographic position and the new entity will provide a higher diversity of products and solutions to meet the specific requirements of each customer, from cost-efficient platforms to latest generation technologies.
The complementarity of the two companies will enable the development of products and the presence on existing markets, as well as the extension and exploitation of new markets. In terms of geographic coverage, in Europe, Alstom is more present in the West, while Siemens in Central Europe and Great Britain, while in the United States market, complementarity expands over the East and the West coasts. Based on this geographic complementarity, there is also a complementarity of products at regional level, as each area/region has its own characteristics, from the needs of operators and passengers to climate necessities. “If you look more into details, you would see that geographically, we are extremely complementary. This good match in terms of geographies is also a good match in terms of products. For example, in tramway, classically, in Central Europe, you have traditional tramway networks, you have a number of high floor tramways, in France you have new networks, more low-floor tramways, and not surprisingly we have this complementarity in terms of products as well,” Lafarge commented.
The global footprint enables the merged company to access growth markets in Middle East and Africa, India, and Middle and South America where Alstom is present, and China, United States and Russia where Siemens is present.
On the long run, the establishment of the new company will enable the harmonisation of technical development, while as regards products, Lafarge said it was still too early to analyse the rationalisation of product lines as the merger’s goal was to take advantage from both platforms to create the best trains for customers. The two companies also consider the possibility of developing global product platforms in time.
A real competitor
The rail market continues to increase and from an average market volume of over EUR 159 billion (in 2013-2015), it will reach EUR 185 billion by 2021 with an increase of over 2,6% a year, according to the latest study of UNIFE – “World Rail Market Study, forecast 2016 to 2021”. The largest market shares are estimated for Western Europe with 3.1% and Africa/Middle East with 3%. Eastern Europe will also register a 2,8% increase followed by Asia Pacific region with 2,6%. Divided on segments, the largest contribution of this increase is estimated for services and rolling stock, representing 68% of the market share.
These estimates encourage companies to access new markets and to consolidate their position in the markets where they are already present. Thus, the Siemens-Alstom merger will create a new company that will consolidate its technical leadership in Europe, creating a new European rail champion with global coverage.
In Europe, the new company will have a dominant position compared to the Chinese manufacturer, as currently the Chinese rail products are rejected in Europe because they don’t meet certification standards. At the same time, the European rail suppliers are confronted with difficulties in accessing the Chinese market, over the past year these problems reducing the market accessibility to just 20% in 2013-2015 (according to UNIFE). There are not just several market segments closed to foreign suppliers, but additional constraints are imposed by contracting authorities on the market segments that are accessible.
Once rival, the two companies, Alstom and Siemens, agreed to create a new company to face the competition of CRRC, a company resulted from the merger of state-owned companies CNR and CSR in 2015.
Siemens AG’s CEO has also referred to CRRC saying that the rail market has changed and that the Chinese company has already created a dominant global position. Moreover, Lafarge said that CRRC changed the market structure. “CRRC, the new Chinese competitor, is extremely strong. At the same time, you have other competitors and this company aims at being a global leader of all the market regardless of whether the competitor is Japanese, Chinese or coming from different places. What matters in this industry is customer proximity and innovation, and this is exactly what this merger will bring. This is clearly something on both sides where we are advanced as compared to some of our competitors, in particular to the one being quoted, CRRC.”
In the fiscal year 2016/2017, Alstom registered sales of EUR 7.3 billion, 6% more than the previous year and signed contracts worth EUR 10 billion. Previous orders are worth EUR 34.8 billion. A success of the company has been the accession of the US high-speed market. In August 2016, Alstom signed a contract with Amtrak for the delivery of 28 Avelia Liberty trains. The contract is worth EUR 1.8 billion and also includes long-term technical support, delivery of spares and maintenance services.
According to the 2016 annual report, Siemens Mobility Division contracts are worth EUR 7.87 billion, while incomes amounting to EUR 7.82 billion. The largest contracts signed in 2016 included one for the delivery of LRVs in the US, a contract for rail commuter transport in Germany and a contract for the delivery of automated solutions in Algeria valuated at EUR 1.2 billion. Geographically, important income growths were registered in Europe, CIS, Africa, Middle East and America, while in Asia, Australia and China, the company’s results were on a downfall.
In 2016, CRRC’s incomes amounted to EUR 28.9 billion (CNY 224 billion), 5,74% down on previous year, while profit after tax amounted to EUR 1.8 billion (CNY 13.9 billion). In 2016, the new contracts signed by CRRC amounted to EUR 33,86 billion (CNY 262 billion) of which international sales amounted to EUR 6.89 billion (USD 8.1 billion), representing an annual increase of 40%.
CRRC is constantly accelerating its presence in the international market, including in North America and Latin America. Its production centres in Malaysia and India are strategic projects while mergers and BOGE acquisitions in Germany and SMD in the UK generate good results, as CRRC explains. The research and development centres in Germany, UK and US provide the company with the possibility of conquering new markets worldwide. CRRC’s international extension also includes new contracts for delivery of locomotives in Kenya, new metro trains in Thailand, India, the US (Chicago), Australia (Melbourne), freight cars in Pakistan and electric multiple units in the Czech Republic.
These figures place CRRC on the first position in the world. But the company won’t stop here, as plans include more international markets to conquer. “China is ready to compete with global rivals and is set to invest more resources in the rolling stock production segment as part of the Made in China 2025 initiative to stimulate the export of products”, declared Feng Hao, rail researcher within China’s National Development and Reform Commission. As part of the plan for doubling sales outside China, a strategy that would result in a USD 15 billion increase, CRRC announced plans to build more factories. By 2020, CRRC plans to open 11 regional subsidiaries and will continue to target key markets such as Europe, North America, Russia and Central Asia.
According to the latest financial year, CRRC’s international revenues from rail activities amounted to EUR 30,5 billion, followed by Siemens with EUR 8 billion and Alstom, with 7.3 billion. Bombardier ranks fourth with EUR 6.8 billion, followed by GE with EUR 4,3 billion.
Siemens-Alstom merger revenues from rail activities amounts to EUR 15.3 billion, ranking the new company second worldwide, after CRRC.
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