Deal: Trade sale
Company sold: Deutsche Waggonbau
Buyer: Bombardier, Canada
Completed: February 2 1998
Adviser: Advent International
The last thing you might expect to hear, when telephoning Deutsche Waggonbau (DWA), the train rolling-stock manufacturer based in east Berlin, is calypso music. But that’s what you get when waiting to talk to one of their busy staff. The party mood is quite appropriate.
The company has long been heralded as one of the few success stories to have emerged from the mire of east German industry. It steadily built up its market share first within the Treuhand system (the process designed to privatize former East Germany’s businesses), and then, since 1995, under the ownership of investors advised by venture capital firm Advent International. Last month plans to list DWA on the Frankfurt stock exchange were dropped in favour of a trade sale to Bombardier, a Montreal firm specializing in transportation equipment, aerospace and recreational products.
DWA owes its success to two crucial factors. First, it enjoyed a near monopoly on supplying train carriages to Deutsche Reichsbahn, East Germany’s rail network. It was also a major supplier of carriages to rail networks in other Soviet- bloc countries, especially Russia’s Leningrad-Vladivostok passenger service. It continued to sell carriages to Russia when the two Germanys unified in 1990, and the company invested heavily in its plant at Ammendorf to be able to supply 5,000 carriages a year to Russia. DWA is now in the process of increasing its minority holding in a specialized wagon-refurbishing company in Russia to take a majority stake.
While this work was enough to tide it over, it was the company’s ability to break into the west German market which would secure its future. And that was not clear cut. The west German rail-car market was dominated by Siemens, ABB and AEG. Each of these companies was faced with restructuring its business and none was keen on buying more capacity. The Treuhand administrators were anxious to keep DWA running, so, with no investment forthcoming from a rival company, they were more receptive to approaches by Advent International than some had expected.
Advent made contact in spring 1994; the sale and purchase agreement was signed in June 1995; and the sale was officially approved by the finance ministry in February 1996. Before agreeing finally to invest in DWA, Advent and its investors spent a long time in discussions with the company’s supervisory board.
“Under the German co-determination law, half of the board has to be represented by the employees and the unions,” says a source close to the companies involved. This law, as with much corporate governance in Germany, is designed to embrace all elements of society into business, a concept that worked well in the past, but has held back German industry’s competitiveness in the 1990s. But DWA’s management and employees were more than enthusiastic about the sale and raised no objections to using Anglo-Saxon venture capitalists. “Advent and the investors wanted to secure the backing of all concerned for their restructuring plan, which included shutting down the Dessau plant, before committing themselves,” continues the source. “The employees were incredibly motivated, realizing that this was probably their one chance to make a success of the company.” A generous stock-ownership scheme for 85 managers also helped with the motivation.
Since Advent’s investors first got involved in 1994, DWA has taken a majority stake in Czech rail equipment producer Vagonka Ceska Lipa and has become one of the main suppliers to the German rail operator, Deutsche Bahn, having reconfigured its double-decker carriages to their standards. DWA’s ability to undercut its three larger competitors appealed to Deutsche Bahn. Another of DWA’s other notable successes has been to win the contract to supply passenger cars for Berlin’s extensive s-Bahn network (urban rail system), a contract it shares with Abtranz, a joint venture between ABB and Daimler-Benz.
As a result, 80% of DWA’s business is now within Germany, and last year’s unaudited revenue was Dm1.1 billion ($608 million). Having made substantial inroads into the German market, and with the contacts to Russia still active Russia is expected to be the largest market for rail carriages after China in the next decade the investors were intending to realize their profits by listing the company on the Frankfurt stock exchange in the second quarter of this year. And a good deal of progress had been made in preparing for it; rumours put the estimated listing value in the upper hundreds of millions of Deutschmarks.
But in September last year Bombardier gave its first serious indication of interest. Arrangements for a public offering were already underway, so the Canadian company had only a small window of opportunity. But the attractions of a trade sale soon became obvious to the investor group. Bombardier, while it had businesses in France, Belgium and the UK, was not a big player in Europe, so job losses would be less likely. The deal would also address an issue which an independent, listed DWA would have had to have faced sooner or later size.
“So much has changed in this industry in the last four years,” says one insider. “Consolidation is moving quickly, and there is a general feeling that there will only be three global players within five years.” Neither DWA nor Bombardier would have been one of these players alone, but combined they become, according to some estimates, the second-largest rail car producer in the world.
The investors and DWA managers alike were soon impressed by the speed and professionalism with which Bombardier concluded the deal. It had up to 75 people working on due diligence during October and November, including chairman and chief operating officer Laurent Beaudoin. A memorandum of understanding was signed just before Christmas and the deal was completed on February 2.
Those involved refuse to reveal the financial details of the sale. Germany, say some insiders, is ruled by envy, with many not agreeing with the idea that managers can make a profit. Better, they say, not to reveal anything. But the German finance ministry cannot complain. It valued DWA higher than the price Advent’s investors paid, so the venture-capital firm struck an agreement that the ministry would receive a lower price than it wanted in 1995, but get half of the profits from any flotation or sale. The deal, say insiders, was possibly the best return on an investment Advent has ever made. The ministry must be laughing all the way to a more balanced budget.
