Siemens, Alstom set for rail merger?

European industrial rivals Alstom and Siemens, makers of the flagship French TGV and German ICE high-speed trains respectively, have come up with a "balanced agreement acceptable to both sides," German business daily Handelsblatt reported on Monday, citing insiders familiar with the deal.

French daily Le Monde reported on Friday that Siemens' rail and signaling assets would be valued at around €7 billion ($8.3 billion) and that Alstom would issue new shares to Siemens as part of the transaction.

The paper reported that Siemens would take a 45 to 50 percent stake in Alstom and contribute its own shares worth €7 billion. Siemens would hold a narrow majority of the shares in the intended joint venture, while the chief executive would come from Alstom, Reuters news agency reported, citing sources familiar with the talks.

Read more: Chinese train makers overtake European rivals

Siemens earns €7.8 billion ($9.3 billion) of annual revenue from rail, while Alstom has sales of €7.3 billion ($8.8 billion). Their combined revenue would be just below the roughly €18 billion figure at China Railway Rolling Stock (CRRC), a state-owned entity.

The supervisory board of Siemens, based in Munich, is meeting in an extraordinary session on Tuesday to discuss the options, Handelsblatt reported. 

In an eventual merger, analysts believe Siemens could follow the model that the Munich-based company used with a joint venture in 2016 when it hived off its wind power division into a JV with Spanish rival Gamesa, which remained listed on the stock exchange.

EU green light?

Handelsblatt reported that European authorities were expected to green light the deal as it would create an EU-based champion on global markets. Advisers to German Chancellor Angela Merkel and French President Emmanuel Macron were involved in the talks, Le Monde reported. 

Read more: 'Made in China' high-speed trains going global

Macron's government has signaled it supports deeper Franco-German corporate ties. "It is important that we strengthen our industries in partnership with Germany," said government spokesman Christophe Castaner. "There is no concern on the French side when big corporations work together, as long as synergies do not lead to job losses."

The model for such cooperation between the eurozone's two biggest economies is Airbus, the Toulouse-based aircraft manufacturer formed from companies from four European countries.

Closer ties between French and German companies could also happen in the banking sector, with French lender BNP Paribas among the European banks that could buy Germany's Commerzbank. France's PSA Group acquired German automaker Opel from General Motors this year.

Alstom has been under pressure from the French government not to cut jobs and was prevented from stopping production at a site in the eastern part of the country in 2016. France's government, which already owns 20 percent of the shares in Alstom, is considering extending its stake by another 20 percent through the purchase of shares held by major shareholder Bouygues.   

Other options

Siemens has also been talking with Canadian firm Bombardier, whose European operations are based in Berlin.

The two companies reportedly had a detailed plan for two joint ventures covering rolling stock and signaling, the former being managed by the Canadians and the latter by Siemens.

The railway division of Bombardier, which came out of the former German Adtranz, is the most important unit of the Canadian group.

Bombardier employs some 8,500 in Germany, compared to Alstom's around 3,000 people. The Canadians decided in June to reorganize their German sites, which are concentrated in the eastern part of the country, and up to 2,200 jobs will be cut by 2020. 

Siemens' and Bombardier's rail operations have significant overlap in Europe, especially Germany, and an agreement between the two would raise the chances of asset sales to fend off regulatory concerns and job cuts.

Chinese competition

Analysts say Europe's leaders in rail need to consolidate so they can better compete with CRRC, which is making inroads into the European market, for example by eying Skoda Transportation in the Czech Republic to gain a potential foothold on the continent.

The Chinese government merged train makers CSR Corp and China CNR Corp to form CRRC in 2014 specifically to compete with Siemens and Alstom. As it expands abroad, the company has said it will manufacture in its key markets, purchase local materials and utilize local manpower.

Its subsidiaries have invested 3 billion yuan ($434.4 million) buying up European technologies and manufacturing parts suppliers including the UK-based Dynex and Germany's Boge Elastmetall.

CRRC's overseas revenue doubled to 26.4 billion yuan ($3.9 billion) in 2016, the most for the Beijing-based company on record and making up 11 percent of its overall sales.

Siemens CEO Joe Kaeser has said several times in the past that there is a need for closer cooperation in the industry to combat CRRC. "Of course you'll have to build a strong number two," he said in August.

jbh/sri (AFP, dpa)