MUNICH/PARIS – Hitachi Ltd.’s agreement to buy the rail signaling business of Italy’s Finmeccanica SpA in its largest overseas purchase ever will boost the company’s European manufacturing base, increasing competition for the train units of Siemens AG and Alstom SA.
The European train-makers posted stagnant profits in recent years amidst rising Asian competition and constrained public investments in their home markets.
Hitachi, which builds key parts of Japan’s bullet trains, is seeking growth abroad and European orders for express and commuter trains.
“The transaction sends a clear message that the company’s focus is on global growth and especially on developing the European market,” said Damian Thong, an analyst at Macquarie Securities Ltd. in Tokyo.
Siemens’s transportation business, with about €6 billion ($6.8 billion) in annual revenue, has burdened profit at the Munich-based company since 2011 as delays to orders from German national rail operator Deutsche Bahn AG precipitated hundreds of millions of euros in charges.
For Alstom, success in the rail business is paramount after the French manufacturer last year sold most of its energy operations to General Electric Co.
Hitachi already moved its global rail headquarters to London last year and is building a plant in northeast England after winning a £5.7 billion ($8.8 billion) contract to supply express trains for routes in Britain. Capable of 200 kph, the new Class 800 model will enter service in 2017 on the Great Western Line and 2018 on the East Coast Line.
Still, Siemens and Alstom, the makers of Germany’s ICE and France’s TGV high-speed trains, may prefer Hitachi’s deal for the Italian company over an acquisition by one of China’s state-backed train-makers, such as CNR Corp., which had also been interested in the asset.
“It’s a relief that it hasn’t fallen into the hands of a Chinese player,” said William Mackie, an analyst at Kepler Cheuvreux. Potential subsidies by the Chinese state could have made it more difficult for Alstom and Siemens to compete, he said.
Finmeccanica in October short listed CNR and Hitachi as potential buyers for its rail assets. CNR was then bought by bigger Chinese rival CSR Corp. as the country’s two biggest train-makers seek to boost exports of the country’s high-speed rail technology.
The bulk of the latest Hitachi deal — €773 million — is for Finmeccanica’s signaling business, Ansaldo STS SpA. Both Siemens and Alstom have in the past three years been expanding in that market, to capture more profitable service and replacement contracts.
Profitability at Siemens’ transport unit has fluctuated in recent years, falling from a 7.9 percent margin in 2010 to a €448 million loss in 2013. That recovered to a 5 percent profit margin in 2014, helped by the acquisition of Invensys Plc’s rail signaling operations.
Alstom Transport’s operating margin dropped from 7.1 percent of sales in the 12 months through March 2011 to 5.1 percent in the following year, and rebounded to 5.6 percent in fiscal 2014.
Hitachi’s first major rail contract in Europe involved the export of 29 Class-395 trains for domestic services on Britain’s High Speed 1 Line between London and the Channel Tunnel. The Japanese company also last year unveiled a prototype train aimed at penetrating the European commuter market for the first time.
Hitachi said in December it was working on new rail orders that could lead it to consider a plant in Germany, the home market of Siemens, or expansion of the County Durham facility in the U.K.
Finmeccanica’s rail business now completes Hitachi’s offering in Europe, according to Kepler Cheuvreux’s Mackie.
“The deal will allow them to offer a complete solution for rail transportation needs in Europe,” he said.
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