If all goes according to plan, the long-anticipated partial privatisation of Germany’s national railway will finally come to fruition by the end of this year. A 24·9% stake in the newly-established operating business DB Mobility Logistics AG is due to be floated on the Frankfurt Stock Exchange.
Target date is November 5, although there have been suggestions that this might have to be delayed because of the weakening German economy and the global credit crunch. Nevertheless, Federal Transport Minister Wolfgang Tiefensee and Deutsche Bahn AG Chairman Hartmut Mehdorn are pressing ahead. Tiefensee, in particular, is keen to get the sale completed well ahead of the national elections scheduled for September 2009.
Mehdorn has long advocated taking DB into the private sector, and he welcomed the government’s formal approval of the flotation plan on May 30 as 'a good day for customers, taxpayers and workers’, adding that the decision would ensure 'the future of the business and its 237 000 employees’ and help to strengthen the German economy.
A tight timescale
Around 30 banks are understood to have expressed interest in organising what is expected to be one of the most prestigious IPOs in Europe this year. Following a joint selection process with the government, DB AG announced on May 27 that it had selected Goldman Sachs, Morgan Stanley and UBS as global co-ordinators to lead the flotation. According to reports in Handelsblatt, the government will meet the cost of organising the sale, which it puts at €75m compared to a market estimate of €100m.
The actual flotation is predicted to generate between €5bn and €8bn, depending upon the final share price. Mehdorn is due to launch an international roadshow in early October to canvass support amongst potential investors, and this will be followed by a bookbuilding exercise to establish the sale price. The price may not be announced until October 28 or 29, barely a week ahead of the date when the shares are due to start trading. Reports suggest that both DB and the government are anxious that the flotation is not postponed into early 2009, and both would be willing to accept a lower price in order to push the sale through quickly.
According to the government, the majority of shares are likely to be bought by institutional investors, although there are suggestions that some other railway operators might welcome the chance to take a stake in DB. So far the only player to have confirmed its interest publicly is RZD, although President Vladimir Yakunin admitted that it was up to the Russian government to decide whether the railway would be allowed to bid.
Asked to comment on the flotation process, a Federal Transport Ministry spokesman explained on August 19 that the government was 'pleased that investors will be able to bring their ideas and visions into DB ML’. However, the ministry is concerned about the degree of influence that the investors would have over railway strategy, such as whether or not 'services are given priority over profit expectations’.
Pointing out that it would not be right for the investors to have control over employment terms, as an example, the ministry insisted that 'we want to have partners on board who can take a long-term perspective, but we want to prevent them from interfering with the business in a way that would be bad for DB ML’.
Long road to flotation
The total or partial privatisation of DB AG was always seen as the ultimate objective of Germany’s railway reform process launched in 1994, although this took a lower priority than dealing with the backlog of maintenance and productivity issues inherited after the merger of DB and DR.
With modernisation and renewals well underway, a Railway Advisory Council of leading industrialists, academics and economists was established in October 2002 to look at completing the reform process. Following a study by Morgan Stanley, the council recommended in June 2004 that DB AG should be listed 'as an integrated business’ during 2006.
The council believed that a partial privatisation would enable DB to compete more effectively in an increasingly liberalised market, although it flagged up that the flotation would be dependent upon agreement between the railway and government over infrastructure financing.
The timescale proposed by the council was immediately rejected by the Bundestag, which argued that it would be better to wait until DB had demonstrated its profitability for a number of years before launching the flotation. It also called for a study into floating DB without the infrastructure (RG 7.04 p381).
Infrastructure has indeed proved to be one of the major stumbling blocks in the development of the privatisation proposals, and in particular the degree to which the management of the national rail network should be separated from DB’s train operations in line with European Union policy.
Mehdorn’s often-expressed preference had been to see DB floated as an integrated business, which he said would make the company stronger and better able to compete on the international money markets. However, there were strong political objections to handing over control of state-owned infrastructure assets.
After extensive studies, a compromise was proposed in the draft legislation which the government presented to the Bundestag in September 2007. This envisaged that the infrastructure would remain state-owned, but DB would have an enshrined right to manage the network. This proved unpalatable, and even a compromise suggesting a long-term infrastructure management contract was rejected, leading the government to withdraw its entire proposal for 'reconsideration’ earlier this year.
Restructuring in haste
The result was a switch to a 'holding company’ model, which had widely been touted as the likely fallback. Moving rapidly to get the flotation underway ahead of the 2009 elections, the ruling Christian Democratic Union party finally struck a deal with its SDP coalition partner on April 13 to reform DB and only float the operating businesses. It rejected SDP proposals to exclude regional passenger services, but did agree that the operating arm should be offered as a single entity, ruling out the sale of separate stakes in the inter-city or freight businesses.
At the same time, the government conceded to an SDP demand that the proportion of the shares on offer should be cut from 49% to 24·9%. Despite this, both Tiefensee and Mehdorn hope to see the private-sector holding increased to 49·9% in the longer term. With the infrastructure remaining in state ownership, some commentators have suggested that the share of the operating company to be sold should be proportionately greater, although it seems unlikely that the government could get approval to privatise a majority stake.
The revised plans were endorsed by the cabinet on April 30 (RG 5.08 p289). And barely two weeks later, an extraordinary meeting of the DB Supervisory Board approved the restructuring of the company to enable the flotation to proceed.
This saw the existing subsidiary DB Mobility Logistics AG — which was already acting as an umbrella for the Railion, Schenker and Stinnes freight activities — expanded to form the new operating company, with the inclusion of the passenger businesses and other subsidiaries (right). Infrastructure business DB Netz, the power supply arm DB Energie and DB Stations & Service continue to report directly to DB AG, which will remain 100% owned by the German state.
Enshrining the ministry’s wish to safeguard existing railway staff, DB signed an agreement with the Transnet and GDBA unions on May 15 protecting pay and conditions and precluding any forced redundancies as a result of privatisation until the end of 2023. According to Transnet, this also commits DB AG to retaining an integrated business 'and the employment market within it’.
The new structure became operational on June 2, along with a three-way agreement between DB AG, DB Mobility Logistics AG and the federal government. This accord was retrospectively endorsed by the Supervisory Board on June 25, when its Chairman Dr Werner Müller insisted that all of the structural and legal conditions for the partial privatisation were now in place.
Despite Müller’s optimism, the European Commission wrote to the German government at the end of June, expressing a number of concerns about the proposed structure. In particular, the Commission is worried about the lack of independence between the infrastructure manager and the operating business when both report to the holding company. If it decides to take these concerns to the European Court for clarification, this could put the whole flotation timescale in doubt.
Independent operators’ association Netzwerk Privatbahnen had already raised concerns over the lack of transparency in the DB structure, which it believed did not meet EU rules requiring an independent body to oversee path allocation and the setting of track access charges. And the degree of independence for DB Netz was one of the issues raised with the German government by the Commission when it launched infringement proceedings against 24 member states for various failures to implement correctly the requirements of the First Railway Package. Not least of its concerns is the ease with which management and staff are able to transfer between businesses in the DB group.
The ministry insists that competition in Germany is stronger than in any other EU country, with many different operators 'already jostling for freight traffic’. And in the regional sector 'the number of private operators is also increasing. The Länder can contract out their regional operations, and private operators can bid on exactly the same terms as DB ML. So competition is already possible with the structure which we have – 100% state ownership of Deutsche Bahn AG. We have now a DB AG with a high quality of service, and that should remain in the future.’
European legislation will also impact on the use of the proceeds from the flotation. During the negotiations, Tiefensee had emphasised that the privatisation would provide much-needed funding towards DB’s 'huge investment needs’. He envisaged that one third of the receipts would be allocated for investment in the infrastructure, one third would go to DB and the final third would be retained by the government.
However, the German competition authorities have ruled that DB ML should not benefit directly from the flotation, suggesting that any payments to the operating business would fall foul of the recently-tightened EU rules on state aid.
The ministry reiterated on August 19 that 'above all the railway’s customers should benefit from the receipts of the partial privatisation. We want to eliminate bottlenecks in the rail network, to modernise stations faster, and to improve noise protection.’
Investing for profitability
DB will not comment officially, citing legal restrictions on making 'forward-looking statements’ ahead of the flotation. However, Mehdorn has clear ambitions for DB to become a global transport operator, with aggressive expansion evident throughout his chairmanship.
With the tacit support of its federal owner, DB has already built up stakes in freight operators from Denmark and the Netherlands to Switzerland and Italy. Moves to acquire control of EWS and Transfesa during 2007 have now given it access to the UK, France and Spain. Further afield, DB has signed joint venture agreements in Russia and China, operating experimental freight trains between Germany and China as well as over the Balkan route to Turkey and beyond. Outside the rail orbit, DB has acquired road, sea and air operations that now make it one of the world’s largest logistics companies.
Mehdorn has certainly heeded the 2004 recommendation from the Bundestag that DB needed to demonstrate its profitability before any flotation. Announcing the 2007 results on March 31, he emphasised that DB had recorded an operating profit for the third year running. 'Our strategy is clearly right’, he insisted. 'DB is ?fit for the challenge, both at home ?and in Europe.’
With turnover up by 4·2% on 2006 at €31·3bn, DB recorded an operating EBIT of €2·37bn in 2007. Net profit for the year was up by 2·1% at €1·7bn, despite gross investment totalling €6·3bn. As a result, the company had been able to reduce its long-term debt by more than €3bn to €16·5bn. Return on capital increased from 5·5 to 8·7%, which Board Member, Finance, Diethelm Sack said was in line with long-term plans.
As in previous years, DB’s biggest revenue generator in 2007 was its regional services, which contributed €6 532m compared to €3 265m for long-distance passenger, €1 879m for urban and €3 878m for freight. However, it should be noted that €4 483m of this came through contract payments from the Länder to support regional operations. Barely a quarter of regional services in Germany have yet been put out to competitive tender, but the rest are due to be contracted out over the next 15 years. DB has won less than 50% of the services tendered so far, although it secured 70% of the 33 million train-km contracted in 2007, and says it will 'defend its position’ vigorously in future bidding.
Announcing DB’s first-half results on August 18, Mehdorn reported a further improvement in profitability. He said DB had recorded 941 million passenger-journeys in the first six months of 2008, up by 30 million on the same period last year. He attributed this to high fuel prices hitting car and air travel, noting that the total distance driven by German car owners in the six months had fallen by 1·5% year-on-year against a 1·4% increase in rail passenger-km.
Freight traffic is continuing to hold up in the face of recession, although the rate of growth has slowed. The first results from EWS contributed to a 6·8% jump in total revenue to €16·2bn for the period. With profit for the six months rising by 5·4% to €915m, Mehdorn said DB ML’s full-year results should be better than 2007. This comes despite higher operating costs attributable to rising energy prices and huge wage increases after last year’s strike by train drivers.
Despite the continuing uncertainties, Mehdorn is still convinced that a flotation is the right way to go. 'The transport market in Europe is changing rapidly and radically’, he says. 'DB AG needs to take its chances now, and that means we will need capital. And the government agrees that we need to finance much-needed infrastructure investment with the proceeds from the partial privatisation’.
Milestones to flotation
1994. Start of German railway reform process
October 8 2002. Railway Advisory Council established to look at concluding the reform process.
June 15 2004. RAC recommends a stock market listing of DB AG 'as an integrated company’ during 2006.
September 21 2007. Government bill for partial privatisation has first reading in the Bundestag.
Mid-February 2008. Government proposal collapses after Länder reject plans to give the part-privatised railway exclusive control of the state-owned infrastructure.
March 31 2008. DB announces third successive annual profit in 2007 results.
April 13 2008. Transport Minister Wolfgang Tiefensee reaches agreement with SPD coalition partners reducing proportion of sale from 49% to 24·9%
April 28 2008. Chancellor Angela Merkel confirms that a government committee had approved the sale of a 24·9% stake. The plan was endorsed by the cabinet two days later.
May 15 2008. DB Supervisory Board approves restructuring to form holding company, with operations grouped in DB Mobility Logistics AG. New structure takes effect from June 2.
Early October. International roadshow to attract investors, followed by bookbuilding exercise to set share price for the flotation.
October 28 or 29. Share price announced.
November 5. IPO completed; DB ML shares start trading on Frankfurt Stock Exchange.
DB business units
DB AG (holding company)
DB Energie GmbH
DB Stations & Service GmbH
DB Mobility Logistics AG
DB Fernverkehr AG
DB Regio AG
DB Stadtverkehr GmbH
DB Vertrieb GmbH
DB Dienstleistungen GmbH
DB (UK) Logistics Holdings Ltd
DB Automotive Rail (Spain) SL
DB Gastronomie GmbH
DB Magnetbahn GmbH
DB Schenker Rail
DB Schenker Logistics
Hartmut Mehdorn (Chairman)
Diethelm Sack (Finance)
Stefan Garber (Infrastructure & Services)
Otto Wiesheu (Economic & Political Affairs)
Norbert Hansen (Purchasing)
DB Mobility Logistics AG
Hartmut Mehdorn (Chairman)
Diethelm Sack (Finance)
Margret Suckale (Personnel & Legal)
Karl-Friedrich Rausch (Passenger)
Norbert Bensel (Transport & Logistics)