Deutsche Bahn offers 1.54 billion pounds for Britain's Arriva

Deutsche Bahn's plan to acquire UK transport provider Arriva appears to be on track. The takeover - the most expensive in the German company's history - is aimed at strengthening its passenger business throughout Europe.

British train and bus operator Arriva has confirmed that German state rail company Deutsche Bahn is willing to pay 1.54 billion pounds (1.8 billion euros) in cash to buy its operations as advanced talks continue.

Media reports said that if Arriva's debt is taken into account, the total value of the offer is 2.7 billion euros. Reuters news agency quoted sources close to the deal who said the takeover would be financed entirely through the issuance of bonds, and could be approved by Deutsche Bahn's supervisory board as early as next week.

The acquisition, which would confirm Deutsche Bahn as Europe's largest rail transport operator, could also trigger a wave of consolidation in the rail sector. French rail company SNCF, which held talks with Arriva as well, is equally keen to expand its footprint throughout Europe.

Deutsche Bahn and Arriva have been in talks for several weeks. The German operator has made no secret of its interest in acquiring the UK company, which operates bus networks, rail franchises and other transportation services in 12 European countries.

Arriva is the only big British transport group to have ventured into Europe, where it has taken advantage of gradual market liberalization. Its European operations account for nearly half of its revenue.

Last month at the presentation of the group's financial results, Deutsche Bahn Chief Executive Officer Ruediger Grube said the company plans to run its high-speed long-distance trains through the Channel Tunnel and "further actively expand" its business activities beyond Germany's national borders.

Deutsche Bahn is keen to move beyond its home territory as Germany's domestic rail market opens up to competition. The UK is high on its list of target countries. The rail company has already made a number of acquisitions in Britain including Chiltern Railways, which offers service between Marylebone and Birmingham, and EWS, the freight operator. It also runs the Tyne & Wear Metro and holds a 50 percent stake in the London Overground rail network.

Pros and cons

Richard Talbot, an analyst with The Railway Consultancy in London, said a takeover of Arriva could benefit the UK rail market in several ways. "Deutsche Bahn would bring technology know-how and system management skills," he said. "The company would also be another powerful player competing in the franchise bidding process."

Commuters who use UK trains also see benefits. "Trains in the UK have a very poor reputation when it comes to service, punctuality and cost," said Chris Manning, a businessman who commutes daily by train to London and who is familiar with German service. "They need to face competition from continental train companies like Deutsche Bahn to improve quality. These operators are light years ahead."

But consultant Talbot also warned that consolidation could have its drawbacks. "Small can be beautiful, especially when it comes to regional operators that provide a good service cost-efficiently," he said. "Big isn't always necessarily better."

Indeed, some critics of Deutsche Bahn say the state-owned company, which is known for its bureaucracy, could be overextending its resources with its ambitious expansion plans.