State-owned China CNR Corporation Limited (CNR) and China South Locomotive & Rolling Stock Corporation Limited (CSR) announced in a joint statement on December 30, 2014 that they will merge to form a single company—China Railway Stock Corp. (CRRC)—valued at $26 billion.

CSR will purchase shares from CNR shareholders on the Shanghai and Hong Kong stock exchanges at a rate of 1.1 CSR shares for each CNR share and then delist the CNR shares in order to complete the merger. CNR’s shares jumped 45 percent in light of the deal, while CSR’s shares jumped 32 percent.

All existing contracts nationally and internationally will transfer to CRRC, including orders worth $275 million from Argentina and a $570 million contract to supply passenger cars for Boston’s subway system. The new company also intends to re-bid on a contract for Mexico’s high-speed rail project, which a CSR-involved coalition lost after corruption charges forced Mexican president Enrique Peña Nieto to cancel the original deal.

According to Railway Gazette, the two companies together control over 90 percent of China’s train industry. Shanghai Daily reports their combined annual revenue in 2013 was $32.3 billion, ranking them between Siemens ($96.5 billion) and Bombardier ($18.2 billion). The Financial Times reports that CNR and CSR will see a 14 percent jump in profits once they’ve combined, according to Barclays analysts. This would represent an additional $92.4 million after their combined net profits of $660 million in 2014.

China’s central government gave up control, but maintained ownership, of the two companies during state-owned enterprise restructuring in 2000. CNR and CSR were then free to pursue competitive agendas to the benefit of China’s domestic railway industry, and flourished in China’s push to connect the country by rail. CRRC will remain state-owned and supported by the Chinese government, which plans to invest $1.2 trillion in overseas projects over the next ten years. CRRC will also receive investment from regional backers like the Silk Road Fund and the Asian Infrastructure Investment Bank.

(Photo by Ryan McFarland via Flickr)

Posted by Lauren Dodillet