Break-up or make-up?

Fast company: a CSR train

China’s best-known historical novel The Romance of the Three Kingdoms begins with a statement that might resonate with voters in Scotland this week: “The truism of this world is that anything long divided will surely unite, and anything long united will surely divide.”

The same insight applies to corporate mergers and acquisitions. Companies combine and companies split. The case of AOL and Time Warner is one example. More recently BHP Billiton has also announced plans to divest parts of the company that it once rushed to acquire.

On the flipside it seems that those long divided may be united once more in China’s rail industry. Earlier this month Century Weekly reported that the State Council had “basically decided” to merge back together the two biggest railway equipment makers CSR Corp and CNR Corp. The magazine reported the deal is still in the preliminary stages and the two firms have yet to begin formal talks. But other domestic media quickly followed up and confirmed the plan.

CNR was established in 2000 and CSR followed two years later. They were both spun out of the powerful Ministry of Railways where they were a single entity. The intent behind splitting them was to introduce greater competition among state firms. The move followed the breaking up of other monopolies, for example in the telecoms sector (a move that eventually produced the rival firms China Mobile, China Unicom and China Telecom).

The reversal of the trend has surprised many investors, not least because CNR only went public in Hong Kong in May. But according to Century Weekly, policymakers think that the dual-trainmaker plan has backfired – not necessarily in China, but abroad . CNR and CSR have been competing for overseas business, often hobbling the other with their aggressive bidding tactics. A confrontation in 2011 over a deal in Turkey ended up with both firms losing the contract to a South Korean rival. “Similar situations have also occurred elsewhere, including in 2013 in Argentina, prompting the former Ministry of Railways to criticise the two openly,” Century Weekly noted.

The rivalry is threatening to derail China’s global ambitions to sell its bullet trains abroad. Chinese Premier Li Keqiang has been one of the biggest salesmen for made-in-China equipment and technologies, signing a slew of rail projects during his visits to Southeast Asia, Eastern Europe, Africa and Latin America. But before a new giant is created, the state firms in the train sector will need to sort out their differences. Another industry player isn’t likely to be pleased to hear about the potential consolidation, for instance. China Railway Corp (CRC), the operator of the national network (and itself spun out of the rail ministry last year), plans to spend Rmb150 billion ($24 billion) on trains and maintenance this year. It seems likely to lose one potential supplier. “Probably CRC won’t be too happy to see there is only one bidder for its massive contracts,” says CBN, adding that the rail operator places 75% of the orders CNR and CSR get.

CNR and CSR will also have different views on how consolidation should proceed. Century Weekly said both firms have submitted merger plans to Sasac, the state asset regulator.

“CSR wants CNR to delist from Shanghai and Hong Kong, then merge its assets into CSR,” the magazine reports. “CNR wants to set up a new parent company and keep the two firms subsidiaries.”

So expect uncertainty in the months ahead for the duopoly’s shareholders (the collective market value of the firms’ shares is about $22 billion). Most insiders seem to think that the merger will proceed. “If the State Council wants the railway merger to happen, it most certainly will,” Forbes agrees. But the magazine notes that the plan could also be interpreted as a case in which Li’s self-declared drive for greater market competition seems to be hitting the buffers.

“The railway merger seems counterproductive and could send the wrong signal on the direction of reform,” the magazine suggests.

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