The announcement of the agreement to merge Siemens and Alstom’s train assets will create a large European champion, which should be better placed to compete with increased competition from China’s CRRC. It marks the end of speculation on a number of outcomes, and on whether the vested interests of both France and Germany could be satisfied.
The framework agreement still has to be approved by regulators and shareholders. However, assuming the approval is forthcoming, the increased scale will make the combined businesses more able to compete with the behemoth of CRRC, which has annual revenues larger than the prospective combined European entity. CRRC has been increasingly looking to compete outside of China, and has already won projects in both the UK and Czech Republic. It is also expected to bid for work from HS2 (a planned high-speed railway in the UK).
Bombardier – a Canadian manufacturer with a large European business – is thought to be the biggest loser from the announcement, since it remains a subscale competitor in Europe. Bombardier’s bonds were already weak due to the headlines about its aerospace division, and this agreement is unlikely to help.
Rail infrastructure offers a variety of opportunities for bondholders to invest in, including the manufacturers of “kit” such as Alstom, Siemens and Bombardier. These opportunities also extend to the national rail companies such as Deutsche Bahn, Network Rail Infrastructure and SNCF Réseau, who pay for the signalling and other technical equipment that the manufacturers provide. The rolling stock companies such as Great Rolling Stock, Angel Trains and Porterbrook acquire trains and carriages and lease them to operators. These train operating companies (such as First Group and Stagecoach) run the trains. All will be affected by any changes to the choice or price of rolling stock and associated infrastructure, or to any further change in competitive dynamics. We are keeping a close eye on these developments, which have both potential positives and negatives for the end passenger and the bond investor in the railway industry.