MULTINATIONALS: Rail Merger Puts China, EU On Collision Course
Bottom line: The US, EU and other major countries are likely to block the merger of China’s 2 largest rolling stock producers on anti-competitive grounds, forcing Beijing to abandon the deal.
Beijing has become increasingly active in reviewing big global M&A for deals that affect China, but an interesting reversal is set to occur when western countries review a pending mega-merger between the nation’s 2 largest makers of railroad rolling stock. That review could put the west and China on a collision course, as the US and especially the European Union could both have strong cases for blocking the merger of CSR Corp and CNR Corp, which are already 2 of the world’s largest companies that manufacture high speed railroads and related equipment.
Personally speaking, I have to generally commend China for its antitrust reviews of big global M&A so far. Beijing has faced a steep learning curve, as it has only conducted such reviews over the last 5 years after implementing an anti-monopoly law in 2007. In the beginning some of its reviews were clumsy, and many suspected that nationalistic reasons were the real reason for the regulator’s decision to block the purchase of China’s largest juice maker by Coca Cola (NYSE: KO) in 2009 on antitrust grounds.
But more recently reviews have become more balanced, and few deals have been blocked although China occasionally gives approval with certain conditions. The regulator was also criticized early for taking too much time to do many of its reviews, costing companies big money as they waited for Beijing’s approval. But it has recently has taken steps to streamline and expedite the process for the big majority of deals.
All of that said, both the US and especially the EU could have very strong cases for blocking the pending merger of CNR and CSR, which could derail Beijing’s efforts to consolidate the pair. A new Chinese media report points out that CNR and CSR are already both much larger than any of their global rivals, and thus a merger of the pair would create an even larger global behemoth with well over half of the market for building high-speed rail lines worth billions of dollars. (English article)
CNR and CSR are both major exporters, and each generated about 97 billion yuan in revenue in 2013, giving them combined revenue of around $31 billion. That was more than 3 of their top global rivals combined. Among those, the next largest was Germany’s Siemens (Frankfurt: SIEGn), which earned $9.2 billion. It was followed by Canada’s Bombardier (Toronto: BBD) with $8.8 billion, and France’s Alstom (Paris: ALO), whose transport division generated $7.5 billion.
China announced its plan to merge CNR and CSR last year, as part of a program to consolidate the pair that often competed with each other for major global deals, hurting their profits. The merger is uniquely Chinese, as it is being orchestrated by the central government that is the major stakeholder in both CNR and CSR and wants to maximize both companies’ profits.
The only problem is that western governments don’t really care how profitable CNR and CSR are, and are more interested in maintaining healthy competition in the global market. The EU is likely to be especially worried about this deal, since Alstom and Siemens are both based there and are almost certain to feel more pressure from a merged CNR-CSR. The latest reports say CNR and CSR notified Germany of their merger plan on January 5, which means the pair probably sent out similar notifications to other countries where they do business around the same time.
So, what’s likely to happen next? These reviews usually take 3-6 months, though in this case the merger is relatively simple and thus reviews might not take that long. Based on the huge market share a merged company would posses, I would expect the EU, the US and quite possibly other major countries to try to block the deal, which does truly seem anti-competitive. Beijing obviously won’t be happy about that, but may need to learn to accept such decisions if it wants Chinese companies to play in global markets.
Related posts:
