China’s Two Biggest Trainmakers Soar After Agreeing to Merge

By Jonathan Browning and Clement Tan

China’s two biggest trainmakers surged after saying they plan to combine in a $12.3 billion share swap, a move intended to boost exports of the country’s high-speed rail technology.
CSR Corp. (1766) will acquire smaller competitor China CNR Corp. by issuing 1.1 new shares to CNR investors for each share they own, the two companies said in a joint statement today. CNR climbed 43 percent in Hong Kong trading, the biggest jump on record, while CSR soared 31 percent at 10:18 a.m. Both companies are state-owned.
The companies, which had $37 billion of combined sales in the 12 months through September, are merging as competitors such as Germany’s Siemens AG and France’s Alstom SA (ALO) face constrained public spending in developed markets. China is competing aggressively for overseas projects, with Premier Li Keqiang touting the nation’s rail technology on his foreign trips.
Shares of CNR and CSR, which have been halted from
trading since Oct. 27, climbed by the limit in Shanghai today. Infrastructure builder China Railway Group Ltd. (390) jumped 47 percent in Hong Kong during their suspension, while China Railway Construction Corp. advanced 33 percent.
The offer values CNR at 6.19 yuan per Shanghai-traded share, or HK$8.05 for its Hong Kong-listed stock, according to today’s filing. The two companies earned a combined $1.84 billion in net income in the latest 12-month period, according to data compiled by Bloomberg.

Photographer: Forbes Conrad/Bloomberg

A Shenzhen to Guangzhou China Railway high-speed train departs from the East Railway... Read More

Global Competitor

The Chinese companies aren’t the only ones in the industry seeking economies of scale: Earlier this year Siemens, Europe’s largest engineering company, unsuccessfully tried to combine its train operations with Alstom’s transport business as part of an asset swap to buy the French company’s energy assets. Alstom instead sold energy assets to General Electric Co. (GE), and will receive the U.S. company’s rail-signaling unit in exchange.
The two Chinese companies recently embarked on a drive for high-profile overseas projects. CSR won a 1.7 billion yuan ($274 million) contract to provide locomotives and cars for a railway renovation project in Argentina, according to a Dec. 16 statement on the website of China’s State-owned Assets Supervision and Administration Commission.
In October, CNR won a $567 million contract to supply trains for Boston’s subway system, the first rail-related deal for a Chinese company in the U.S.
CNR investors who object to the deal have the option of receiving HK$7.21 in cash for each Hong Kong-traded share they hold.