Merger creates largest rail systems firm

Date: 19/10/1995

By Tim Jones

DAIMLER-BENZ AG, Germany's largest industrial group, is managing to edge out of its loss-making railway systems business thanks in part to a decision made by the European Commission this week.

Having sold the low-voltage switch business of its AEG industrial unit to the US's General Electric last week, the Commission's decision yesterday (18 October) to allow the creation of ABB Daimler-Benz Transportation, the world's largest rail system manufacturer, was the moment of truth.

The new company, ABB Daimler-Benz Transportation, is a merger of the railway activities of Daimler-Benz and those of Swiss-Swedish electrical engineering group ABB, with a work-force of 22,000 and production facilities in 40 countries.

The agreement, announced in March, combines both companies' rail activities in equal shares of 50&percent;. It will operate at arm's length from the two companies and the profits or losses it makes will not be included on the parent firms' balance sheets.

Two-thirds of the sales and manpower of the merged company will come from ABB while AEG's rail unit, which expects to be in the red this year after incurring an operating loss on turnover of 1 billion ecu last year, will make up the rest.

Just to get this group off its hands, Daimler-Benz paid 687 million ecu to ABB in compensation. “That's the equivalent of keeping a business with an element of loss in it,” said Bob Barber, engineering sector analyst at HSBC-James Capel.

“The railway business was a loss-maker for Daimler. It wanted to get out and half of the enlarged railway business is less loss-making even once you add the financing cost (the compensation) to it,” he said.

The Commission had held out against approval of the deal because it would have created a dominant position on the German market for urban transit rolling stock and equipment. To offset this, the firms agreed to sell AEG's Kiepe Elektrik GmbH, a small unit employing 470 people and with annual sales of just 75 million ecu.

Kiepe specialises in making equipment for metro and tram systems and the Commission wanted to ensure the new group would have to buy in equipment for its products, so as to compete on a more equal footing with rivals in this sector.

Yet even with this enforced sale of one of the few money-making parts of the AEG railway system unit, analysts still believe Daimler-Benz has come out a net gainer.

In June, Daimler-Benz, a huge company with a turnover of 56 billion ecu in 1994, shocked the Frankfurt markets when it warned that monetary turbulence would push it into the red in 1995.

While its AEG unit, which has never reported a profit since being taken over by Daimler-Benz in 1985, continues to threaten losses in 1995, yesterday's Commission decision was well received by investors, who added 5 marks to the share price.