MUNICH/PARIS (REUTERS) - German industrial group Siemens and French rival Alstom agreed on Tuesday (Sept 26) to merge their rail operations, creating a European champion to better withstand the international advance of China's state-owned CRRC Corp.
Siemens will own 50 per cent plus a few shares of the joint venture, while Alstom will supply Henri Poupart-Lafarge as chief executive, helping to counter criticism that France is giving up control of another national industrial icon.
The non-executive chairman will come from Siemens.
The framework deal, which still has to be approved by Alstom shareholders as well as regulators, is a Franco-German industrial breakthrough for French President Emmanuel Macron but a move that has riled opposition politicians.
Finance Minister Bruno Le Maire said on Tuesday the French government welcomed the planned tie-up, which he said would protect French jobs.
The French state said it would not exercise an option to buy a 20 per cent stake in Alstom from industrial group Bouygues.
The Siemens and Alstom transport businesses span the iconic French TGV and German ICE high-speed trains as well as signalling and rail technology. They have combined sales of 15.3 billion euros (S$24.4 billion) and earnings before interest and tax of 1.2 billion euros.
"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.
Alstom's Poupart-Lafarge said: "Today is a key moment in Alstom's history, confirming its position as the platform for the rail sector consolidation."
The deal leaves out in the cold Canadian transportation group Bombardier Inc, which also held talks with Siemens, sources have said, and which faces a separate battle this week to protect jobs in Quebec and Northern Ireland.
China's CRRC, with annual revenue of about US$35 billion, is bigger than Siemens Mobility, Alstom and Bombardier Transportation combined.
Previously focused on China, it has won projects in Britain and the Czech Republic in the past year, and is eyeing the United Kingdom's High Speed 2 project, which will connect London with cities in the north of England.
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.
However, the deal prevents Siemens from owning more than 50.5 per cent of Alstom for four years after closing, and includes "certain governance and organizational and employment protections", Siemens and Alstom said in their statement.
The deal is unanimously supported by Alstom's board, Siemens' supervisory board and Alstom shareholder Bouygues, the companies said.
The French government acquired its option on the Bouygues stake in Alstom in 2014 as part of a deal that helped Alstom snub Siemens as a buyer for its energy business in favour of General Electric Co.
Macron was economy minister at the time.
The global headquarters, rolling stock business and stock-market listing of the new entity, to be called Siemens Alstom, will be in Paris and the signalling and technology business in Berlin.
The new company, with 62,300 employees, targets synergies of 470 million euros four years at the latest after closing of the deal, which is expected at the end of 2018.
The companies said their operations were largely complementary, with Alstom present in growth markets in the Middle East and Africa, India, and Central and South America, while Siemens was strong in China, the United States and Russia.
Siemens CEO Kaeser said ahead of the signing of the memorandum of understanding he believed 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," he told Reuters in an interview in New York.
Siemens stands to gain control of Alstom's main business, since all of Alstom's divisions deal with the railways and transportation industries.
While the French government backs the deal, several opposition politicians and French trade union activists expressed concerns.
Their worries centre on France losing control of its TGV high-speed train - a symbol of national pride that has highlighted French engineering skill - and possible job losses.
French right-wing politician Nicolas Dupont-Aignan criticised the deal as being more favourable to Germany than France, as did far-right politician Nicolas Bay, the National Front's secretary general, who said on Twitter that it could result in the "eradication of French industry".
Eric Woerth, a member of the right-wing Republicans' party, voiced similar views on his Twitter account. "Is this now the end of Alstom? Will TGV become German? Why does the government accept such an imbalance?"
A branch of the CFDT trade union representing Alstom workers wrote on Twitter: "Macron abandoned Alstom to GE and he's now abandoning them to Siemens." Macron served as economy minister for two years from August 2014.
Analysts at Exane BNP Paribas raised their rating on Alstom to "neutral" from "underweight" noting a deal offered better growth prospects than remaining a standalone company.
"We suggest that, if they participate, value creation would be limited for Siemens but material for Alstom," the Exane BNP Paribas analysts wrote. "Aside from the M&A (mergers and acquisition) angle, we believe that commercially, this year will be relatively muted for Alstom. With no large contracts in sight, pressure on free cash flow should intensify due to lack of down payments received."