French industrial giant Alstom SA agrees to merge with German engineering giant Siemens AG

The industrial giants have agreed to stand shoulder to shoulder to withstand the assault of China state-owned railways – CRRC Corp Ltd.

In a significant development, French industrial group Alstom SA has agreed to merge its railways business with its German rival Siemens AG in order to create a European giant that can withstand the international advance of China’s state-owned CRRC Corp Ltd.

As part of the deal, Siemens will have a 50% stake in the joint venture, which will be called Siemens Alstom and which will be headed by Henri Poupart-Lafarge. The non-executive chairman will come from Siemens.

Incidentally, the deal has yet to be approved by regulators as well as Alstom’s shareholders.

Although the Franco-German industrial collaboration is a significant breakthrough for French President Emmanuel Macron the move has riled opposition politicians, whose concerns stem from France losing control of its TGV trains, that are a symbol of French engineering skills and is a national pride.

French finance Minister Bruno Le Maire has welcomed the merger saying it would protect French jobs.

The French state said it would not exercise an option to buy a 20 percent stake in Alstom from industrial group Bouygues SA.

This Franco-German merger of equals sends a strong signal in many ways. We put the European idea to work and together with our friends at Alstom, we are creating a new European champion in the rail industry for the long term,” said Siemens CEO Joe Kaeser.

Today is a key moment in Alstom’s history, confirming its position as the platform for the rail sector consolidation,” said Alstom’s Poupart-Lafarge.

Deutsche Bank’s analysts however have placed a “hold” rating on Alstom shares, saying extracting cost savings from the deal could be tricky.

Politicians will also likely try to ensure some form of jobs protection in France (28 percent of Alstom’s workforce) and Germany (39 percent of Siemens workforce), making cost synergies difficult to extract,” wrote analysts in a note to clients.

Meanwhile China’s CRRC, with annual revenues of around $35 billion, is bigger than Siemens Mobility, the rail and infrastructure division of the German conglomerate, Alstom and Bombardier Transportation combined.

CRRC, which had previously focused on projects in China, has won contracts in the Czech Republic and Britain and is now eyeing the UK’s High Speed 2 project, which will connect London with cities in the north of England.

As per the terms of the merger, Siemens will own a maximum of 50.5% in Alstom for four years after closing, and includes “certain governance and organizational and employment protections”, Siemens and Alstom said in their statement.

The deal was supported to the hilt by Alstom’s board, Siemens’ supervisory board and Alstom shareholder Bouygues, said all three companies.

The global headquarters, rolling stock business and stock-market listing of the new entity will be in Paris and the signaling and technology business in Berlin. The merger is expected to be completed by the end of 2018.

As per Siemens CEO, Kaeser, the scale of China’s CRRC left little room for regulators to oppose a deal.

It always depends, but the facts are that there is a dominant player,” said Kaeser in an interview.

Alstom existing shareholders will be paid two special dividends – a control premium of 4 euros per share is to be paid shortly after closing of the transaction and an extraordinary dividend of up to 4 euros per share is to be paid out of the proceeds of Alstom’s put options for its General Electric joint venture, “subject to the cash position of Alstom”.

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