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Siemens-Alstom merger: Aiming for regional prowess [free access]

October 1, 2017

In a historic move, major rivals Germany-based Siemens and France-based Alstom signed a memorandum of understanding (MoU) on September 27, 2017, to combine mobility businesses in a merger of equals. The transaction brings together two innovative players in the railways market to create a new European champion in the rail industry for the long term. Box 1 provides a brief description of both companies. Closing is expected at the end of calendar year 2018.

 

The new entity will benefit from an order backlog of EUR61.2 billion, revenue of EUR15.3 billion, adjusted earnings before interest and taxes (EBIT) of EUR1.2 billion and an adjusted EBIT-margin of 8.0 per cent, based on information extracted from the last annual financial statements of Alstom and Siemens.

 

Box 1: Merging entities


Siemens AG (Berlin and Munich) is a global technology powerhouse that has stood for engineering excellence, innovation, quality, reliability and internationality for more than 165 years. The company is active in more than 200 countries, focussing on the areas of electrification, automation and digitalisation. One of the world's largest producers of energy-efficient, resource-saving technologies, Siemens is a leading supplier of efficient power generation and power transmission solutions and a pioneer in infrastructure solutions as well as automation, drive and software solutions for industry.

 

In fiscal 2016, which ended on September 30, 2016, Siemens generated revenue of EUR79.6 billion and net income of EUR5.6 billion. At the end of September 2016, the company had around 351,000 employees worldwide.

 

Alstom offers a complete range of solutions (from high-speed trains to metros, tramways and e-buses), passenger solutions, customised services (maintenance, modernisation), infrastructure, signalling and digital mobility solutions. The company recorded sales of EUR7.3 billion and booked EUR10.0 billion of orders in FY 2016-17. It has its headquarters in France and is present in over 60 countries. It employs 32,800 people.

 

Source: Siemens press release

 

Motivation


The global market has changed significantly over the last few years. After the 2015 merger of two Chinese rolling-stock companies, the new entity CRRC Corporation has emerged as a formidable rival. The other Asian rival of concern is Japan-based Hitachi. Digitalisation is also expected to dramatically impact the future of mobility.

 

CRRC is fully-owned by the Government of China. It has annual revenue of about USD35 billion, which is larger than the revenue of the three major train and rail technology groups active in Europe, namely, Siemens Mobility, Alstom and Bombardier Transportation combined.

 

CRRC dominates sales to cost-sensitive economies in Africa, Eastern Europe, Latin America and Southeast Asia. It previously focussed on China but recently, it has won projects in Britain, Czech Republic, the United States and Kenya. In the United Kingdom, it is interested in the High Speed 2 project, which will connect London with cities in the north of England.

 

The three companies have been looking at combining their businesses as CRRC embarks on a global expansion drive. The fear is that CRRC’s size and access to cheap finance is driving out competition. The company spends seven times more on research and development (R&D) than Alstom.

 

Hitachi Rail Europe is looking to develop new markets for train sets produced at its GBP82-million rolling stock plant at Newton Aycliffe in northeast England. The company has recently acquired the Italy-based and state-controlled Finmeccanica Group’s AnsaldoBreda rolling stock business and its 40 per cent stake in signalling supplier Ansaldo STS at a cost of USD2.2 billion.

 

Siemens and Alstom are strong in high-speed intercity trains with their ICE and TGV models, respectively. Siemens is also the leader in signalling technology, while Bombardier is stronger in commuter and light-rail trains.

 

Siemens views its position as one of strength in any merger talks. Its train unit is the industry leader as measured by vertical integration and automation. The company has benefited from digital technology used in its other business units.

 

New organisation

 

The corporate name of the combined group will be Siemens Alstom. Its global headquarters as well as the management team for rolling stock will be located in Paris area and the combined entity will remain listed in France.  The business headquarters for Mobility Solutions will be in Germany. 

 

In total, the new entity will have 62,300 employees in over 60 countries. It will be led by Alstom’s CEO. The Board of Directors of the combined group will consist of 11 members and will comprise six directors designated by Siemens, one of them being the Chairman, four independent directors and the CEO. The CEO of Siemens Mobility shall assume an important responsibility in the merged entity.  

 

Synergies

 

In a combined setup, Siemens and Alstom are expected to generate annual synergies of EUR470 million latest by the fourth year of closing and targets net-cash at closing between EUR0.5 billion to EUR1.0 billion.

 

The two businesses are largely complementary in terms of activities and geographies. Alstom is present in growth markets in the Middle East and Africa, India, as well as Central and South America. Siemens is strong in China, the United States and Russia.

 

While a combined entity will control only about 14 per cent of the EUR110-billion rail-equipment market, the footprint will be bigger in parts of Europe. It will offer a significantly increased range of diversified product and solution offerings to meet multi-facetted, customer-specific needs, from cost-efficient mass-market platforms to high-end technologies.

 

Alstom has a big and globally diverse order book, very little debt and is poised for a EUR2.5-billion cash injection related to the sale of its energy business to General Electric in 2015. At the end of the last fiscal year, Alstom had an order backlog of EUR34.8 billion, but the quality of the orders is not visible to outsiders. 

 

Siemens’ rolling-stock unit does lots of manufacturing in high-cost Germany and regularly suffers delays and cost overruns on long-term projects. However, its rail business is more profitable than Alstom's because it sells more high-tech signalling and rail automation products. Siemens will contribute about 60 per cent of the combined group's operating profit.

 

A combined entity should spend proportionally less on R&D and will have a stronger hand in price negotiations with customers and suppliers.

 

Deal

 

Siemens will receive newly issued shares in the combined company representing 50 per cent of Alstom’s share capital and warrants allowing it eventually to acquire another 2 per cent of Alstom shares that can be exercised earliest four years after closing.

 

Alstom shareholders will receive two special dividends: a control premium of EUR4.00 per share (EUR900 million in total) to be paid shortly after closing of the transaction and an extraordinary dividend of up to EUR4.00 per share (EUR900 million) to be paid out of the proceeds of Alstom’s put options for the General Electric (GE) joint ventures of approximately EUR2.5 billion subject to the cash position of Alstom.

 

The deal prevents Siemens from owning more than 50.5 per cent of Alstom for four years after closing, and includes “certain governance and organisational and employment protections”.

 

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 EUR140 million break-fee.

 

Siemens’ pursuit and recent support

 

Alstom has for a long period been a symbol of French industrial might. More recently, its fate has been determined by state largesse, including a bail out by the government in 2004. 

 

The Alstom-Siemens merger has been mooted for years and completes the transformation of the French group.

 

Siemens pursuit of Alstom has a long and involved history featuring the French government. In 2014, Siemens, along with Japan’s Mitsubishi Heavy Industries, attempted to counter an offer from GE for Alstom’s energy assets. GE won that round at EUR9.5 billion, even though it had to accept the French state as a large shareholder while doing so. 

 

As per an option signed in 2014, the Government of France was allowed to purchase 20 per cent of Alstom from Bouygues for a period of 20 months. The option expires in October 2017. The Government of France will not hold a stake in the new entity, marking a shift in France’s policy of industrial intervention and accepting Siemens’ precondition for the deal.

 

This means Bouygues will become Alstom's number one shareholder again with a 28.3 per cent stake. Bouygues has committed to keep its shares until the holding of the extraordinary general meeting deciding on the transaction or July 31, 2018, whichever is earlier.

 

The envisaged transaction is unanimously supported by Alstom’s board (further to a review process of the preparation of the transaction by the Audit Committee acting as an ad hoc committee) and Siemens’s supervisory board.

 

Bombardier left out

 

The train unit of Bombardier is headquartered in Berlin. It recorded EBIT of USD161-million on revenue of USD2-billion in the most recent quarter ended June 30, 2017, as the order book expanded. The train division has led earnings growth in the company. It expects to deliver an EBIT margin of 8 per cent this year.

 

Siemens and Bombardier Incorporated (Bombardier) had been exploring a tie-up but no definitive agreement emerged. A merger of Siemens and Bombardier would have created a company with combined backlog of USD61 billion with pro forma annual revenues of USD16 billion and a margin on EBIT of about 8.5 per cent.

 

Regulatory approvals and Bombardier's ability to access cash flows to service its USD8.7-billion long-term debt were the key issues to be discussed. Bombardier was also likely to have control over the transportation joint venture, which would not have been acceptable to Siemens.

 

It is believed that Siemens also considered the option of establishing two joint-ventures, one in rolling stock and the other in signalling. However, it finally selected Alstom as it was financially more stable than Bombardier.

 

Bombardier shares fell 3.8 per cent in trading on September 28, 2017, to close at USD2.57, their biggest one-day drop since June 21, 2017. Shares in Alstom gained 8 per cent and Siemens added 2 per cent.

 

Risks

 

The transaction is subject to clearance from relevant regulatory authorities, including foreign investment clearance in France and anti-trust authorities as well as the confirmation by the French capital market authority (AMF) that no mandatory takeover offer has to be launched by Siemens following completion of the contribution.

 

The merger is subject to the fulfilment of certain conditions. The risks, uncertainties and factors likely to influence the merger, include but is not limited to the failure of Alstom’s shareholders to approve the proposed merger; the effect of regulatory conditions, if any, imposed by regulatory authorities; the reaction of Alstom’s and Siemens’s customers, employees and suppliers to the proposed merger; the ability to promptly and effectively integrate the businesses of Alstom and Siemens; the diversion of management time on merger-related issues; etc.

 

The political opponents of the current government in France have expressed concerns that France could lose control of its TGV high-speed train (a symbol of national pride) and that the merger could lead to job losses.

 

Cutting production costs may be difficult. Politicians will likely try to ensure some form of jobs protection in France (28 per cent of Alstom’s workforce) and Germany (39 per cent of Siemens’ workforce). Rail companies are building factories overseas to win international contracts, while customers tend to want bespoke trains to fit their country's needs. This makes economies of scale difficult. Joining forces might also cause some customers to take their business elsewhere (so-called revenue dis-synergies).

 

Conclusion


The merger is expected to create a serious competitor in Europe and worldwide. International customers accounted for only 8 per cent of CRRC sales last year, when its railway-equipment sales declined. The Alstom and Siemens train businesses have performed quite well in the meantime. The deal is unlikely to come up against objections from regulators over antitrust issues, which was a major concern when Siemens and Alstom were in talks back in 2014. The CRRC merger has lowered the importance of antitrust issues, with regulators thinking globally rather than regionally.