Deutsche Bahn Agrees to Buy U.K.'s Arriva for $2.5 Billion

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Photographer: Ralph Orlowski/Bloomberg

Ruediger Grube, chief executive officer of Deutsche Bahn AG, speaks at an earnings news conference in Frankfurt, on March 25, 2010.

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Photographer: Ralph Orlowski/Bloomberg

Ruediger Grube, chief executive officer of Deutsche Bahn AG, speaks at an earnings news conference in Frankfurt, on March 25, 2010. Close

Ruediger Grube, chief executive officer of Deutsche Bahn AG, speaks at an earnings news conference in Frankfurt, on March 25, 2010.

Photographer: Simon Dawson/Bloomberg

A guard boards a Cross Country train owned by Arriva Plc., at the mainline station in Reading, on March 25, 2010. Close

A guard boards a Cross Country train owned by Arriva Plc., at the mainline station in Reading, on March 25, 2010.

Photographer: Frantzesco Kangaris/Bloomberg

An Arriva Plc bus leaves the bus depot in London, on April 22, 2010. Close

An Arriva Plc bus leaves the bus depot in London, on April 22, 2010.

Photographer: Falko Siewert/Bloomberg

Ruediger Grube, chief executive officer of Deutsche Bahn AG, speaks at a news conference in Berlin, on April 22, 2010. Close

Ruediger Grube, chief executive officer of Deutsche Bahn AG, speaks at a news conference in Berlin, on April 22, 2010.

Deutsche Bahn AG, Germany’s state- owned railway, agreed to buy U.K. bus and train operator Arriva Plc for about 1.6 billion pounds ($2.5 billion) as it seeks to transform into a pan-European transport company.

Arriva investors will receive 775 pence in cash for each share held. The deal will create a group with 16 billion euros in sales that transports 10 million passengers a day, Deutsche Bahn Chief Executive Officer Ruediger Grube told journalists.

The German company is challenging French rival Société Nationale des Chemins de fer Français for primacy in the liberalizing European bus and railway market. Sunderland, England-based Arriva, which ended merger talks with SNCF last month, is the biggest regional player that’s not state-owned.

“No other operator would allow Deutsche Bahn to establish itself that quickly in Europe,” said Karl Burns, an analyst at Shore Capital in Liverpool with a “hold” rating on Arriva. “They’re getting a footprint, rather than a strong business, at the moment. It has potential, but it needs investment.”

Deutsche Bahn intends to use Arriva to expand outside Germany and will retain its name, management team and home base, Grube said. The Berlin-based company already owns Britain’s biggest rail-freight business, together with Chiltern Trains, which provides passenger services from London to Birmingham, and has 50 percent stakes in Wrexham, Shropshire & Marylebone Railway and the London Overground commuter route.

‘Only the Beginning’

“We don’t want our foreign competitors to steal a march on us,” Grube said at a press conference. “We have to act and Arriva is an excellent opportunity. It’s only the beginning of market liberalization and consolidation. We intend to be the drivers and not the driven.”

Arriva rose as much as 4.5 pence, or 0.6 percent, to 770 pence and was up 0.4 percent at 768.5 pence as of 12:04 p.m. in London, giving a market value of 1.53 billion pounds.

The stock has gained 64 percent since Jan 28, when the U.K. company said it had received a merger approach from SNCF’s Keolis unit. Deutsche Bahn wouldn’t pursue a “ruinous” bidding war for the business, Grube said.

Other U.K. rail stocks gained following news of the deal. Stagecoach Group Plc rose as much as 3.8 percent, Go-Ahead Plc 3.2 percent and National Express Group Plc 2.1 percent.

“I don’t see a wave of foreign buyers coming in,” said Douglas McNeill, a transport analyst at Charles Stanley Securities in London. “There aren’t many other groups on the scale of Deutsche Bahn and none of the U.K. targets have the European penetration of Arriva.”

CrossCountry Franchise

Arriva, which employs more than 42,000 people, gets 52 percent of its revenue from U.K. operations including London buses, Welsh trains and the CrossCountry rail franchise that operates the long-distance route from Cornwall to Scotland.

The combination with Deutsche Bahn will be “incredibly powerful,” Arriva CEO David Martin said at the press briefing.

The U.K. company will be given a high degree of autonomy, according to Grube, who said “market development” rather than savings and synergies was the prime driver for the takeover.

“It gives Deutsche Bahn a bigger foothold in U.K. rail and Arriva is also big in buses and has lots of businesses overseas,” said Christian Wolmar, the author of “Broken Rails,” a history of Britain’s railways.

Stockholders in the U.K. company, which would be delisted after the purchase, will also receive a 2009 dividend of 18.8 pence a share for a total price of 793.8 pence a share.

Profit Drop

Deutsche Bahn, which is also taking on Arriva’s 850 million pounds of debt, plans to finance the purchase through a bond sale this summer, Chief Financial Officer Richard Lutz said.

The German company is targeting new markets after net income fell 37 percent to 830 million euros in 2009 following a 12 percent drop in sales. Passenger traffic slipped 1 percent compared with a year earlier and freight slumped 12 percent, according to the railway’s annual report.

Grube said Deutsche Bahn plans to go ahead with an initial public offering, though no decision on the timing had been made.

“Conditions in the current market are not so that we can generate full value now,” the CEO said. “It’s too early, but the day will come.”

Deutsche Bahn, which said March 18 that it had made an approach, is being advised by Lazard Ltd., while Arriva’s advisers are Rothschild and Deutsche Bank AG.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net;

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