April 19 (Bloomberg) -- Deutsche Bahn AG, Germany’s state-owned railway, is in “advanced talks” to buy Arriva Plc for about 1.6 billion pounds ($2.4 billion), the U.K. transport operator said. Arriva rose to the highest price in 1 1/2 years.
Deutsche Bahn plans to offer 775 pence per share in cash for the Sunderland, England-based company, Arriva said in a statement today. The offer is 34 percent more than the March 16 closing price, the day before Arriva announced it received an approach from an unidentified bidder.
Deutsche Bahn’s total offer will exceed 2 billion euros ($2.7 billion) including goodwill and liabilities, according to two people familiar with the plan. Deutsche Bahn spokesman Oliver Schumacher declined to comment.
Deutsche Bahn Chief Executive Officer Ruediger Grube is seeking to buy Arriva to challenge French rival SNCF while at the same time lower his 15 billion euros in debt. Arriva, which ended merger talks with SNCF last month, is the biggest player in the region that’s not state-owned, posting 3.15 billion pounds in 2009 sales. SNCF declined today to comment.
“Total costs of over 2 billion euros for this acquisition are way too high given Deutsche Bahn’s financial situation,” said Christian Boettger, a lecturer at the Berlin-based School of Engineering and Business. “Deutsche Bahn is facing a multitude of domestic problems; they should concentrate on solving these first.”
Arriva rose 24 pence, or 3.3 percent, to 760.5 pence in London trading, the highest closing price since Sept 19, 2008. The stock has gained 53 percent this year, valuing the company at 1.52 billion pounds.
Deutsche Bahn’s supervisory board will meet April 21 to approve the offer, said the people, who declined to be identified because the matter is confidential. Deutsche Bahn has made the bid contingent on the unanimous approval of the Arriva board, Arriva said today. Stockholders would also receive a 2009 dividend of 18.8 pence per share for a total compensation of 793.8 pence per share, the U.K. company said.
“This is towards the top end of the market’s expectations,” Mark Kelly with Olivetree Securities in London said. “Management have done a good job to extract this price, especially given all signs from France have shown for some time that there is no appetite to try and interlope.”
Deutsche Bahn, which said on March 18 that it had approached Arriva, already owns Britain’s biggest rail-freight company, together with Chiltern Trains, which provides passenger services from London to Birmingham.
Deutsche Bahn is targeting new markets after net income fell 37 percent to 830 million euros last year following a 12 percent drop in sales. Passenger traffic slipped 1 percent in 2009 compared with a year earlier and freight slumped 12 percent, according to the railway’s annual report.
“I would welcome this acquisition if it helps strengthen Deutsche Bahn’s position in the European passenger and freight market,” Volkmar Vogel, a lawmaker with German Chancellor Angela Merkel’s ruling Christian Democrats and deputy head of the parliament’s transportation committee, said by phone.
CEO Grube said on March 25 Deutsche Bahn would need an extra year to bring its 15 billion-euro debt level into line with equity capital if it were to buy Arriva. Equity capital rose 7.5 percent in 2009 to 13.1 billion euros, according to Grube, who called debt reduction a “key” priority.
Deutsche Bahn is being advised by Lazard Ltd., while Arriva’s advisers are Deutsche Bank AG and Rothschild.
Arriva, which employs more than 42,000 people, gets 52 percent of its revenue from U.K. operations that include London buses, Welsh trains and the CrossCountry rail franchise that operates the long-distance route from Cornwall to Scotland.
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