January 18, 2019 / 11:56 AM / 9 months ago

Breakingviews - EU can afford to shunt Siemens-Alstom to a siding

European Competition Commissioner Margrethe Vestager holds a news conference at the European Parliament in Strasbourg, France, September 8, 2015. REUTERS/Vincent Kessler

By Liam Proud and Karen Kwok

LONDON (Reuters Breakingviews) - Europe risks sacrificing its antitrust principles at the altar of global competitiveness. That’s a dangerous precedent, particularly since would-be partners Siemens and Alstom are hardly desperate for a deal.

Competition Commissioner Margrethe Vestager could block a merger between Siemens’ train business and peer Alstom that’s garnered support from French and German politicians. She reckons the combined entity would be three times the size of its closest high-speed train and signalling competitors, giving it excessive pricing power over customers including government-sponsored rail operators. Siemens is ready to walk away after competition authorities deemed concessions inadequate. That would rile French Finance Minister Bruno Le Maire, who wants a European champion to protect against China’s CRRC moving onto the pair’s turf, which would put jobs at risk.

But the bloc can afford to shunt Siemens and Alstom into the siding. First, neither side is desperate for the deal. Their book-to-bill ratios - a measure of orders received versus sales billed - were at record highs of 1.25 and 1.39 respectively for the 12 months to the end of September, according to Deutsche Bank. Analysts surveyed by Refinitiv reckon Alstom’s standalone revenue in the year to March 2021 will be almost 9 billion euros, compared with about 8.3 billion euros in the current financial year. Meanwhile as a plan B Siemens could float its low-margin train business, which represents 16 percent of revenue - as it has done with several subsidiaries in recent years.

Granted, Chinese behemoth CRRC is pushing into Africa and eastern Europe and could one day take a bigger chunk out of the European pair’s sales. Its cost of capital is probably much lower given state subsidies and domestic dominance, giving room to undercut Siemens and Alstom, which together have about half CRRC’s revenue. That’s a problem, but waiving competition rules is the wrong solution. Antitrust policy is supposed to protect customers, whom Le Maire is effectively asking to subsidise a European champion – unhelpfully similar to the complaint he levels at China. Anti-dumping measures or subsidies to protect the jobs would be a more transparent way to achieve the same aims.

Alstom’s share price, at 35 euros, is close to its standalone value based on Deutsche Bank’s estimates, implying shareholders expect the deal to fail. If Vestager pulls the plug, the financial downside looks bearable.


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