Deutsche Bahn nears sale of red London bus operator Arriva

Infrastructure investor I Squared Capital is near a deal to buy Deutsche Bahn’s international transport business Arriva, one of the biggest operators of red London buses and train services in the UK. 

A deal to buy the company, which transports 1.5bn rail and bus passengers a year and runs operations in 10 countries, could come within days, according to people briefed on the matter.

The deal would value Arriva at about €1.6bn including debt, some of the people said, cautioning that the deal has not been finalised and the timing could still shift. 

Deutsche Bahn, the German state-owned railway company, has been trying to offload at least part of Arriva for years to raise cash to lower its debt and invest in its ailing domestic operations, and had considered a partial sale as early as 2016. 

Arriva has 35,500 employees and operates a mix of rail services, local buses, commuter coaches and trams. It has a significant presence in the UK, where it runs 4,700 buses, and trains across 15 per cent of the passenger network, including the London Overground system and the CrossCountry and Chiltern Railways franchises. 

In 2022, Arriva’s annual sales rose 3.6 per cent year on year to €4.2bn, according to Deutsche Bahn’s annual report, accounting for 7.5 per cent of the German group’s total revenue. The unit is barely profitable, generating an adjusted operating profit of just €12mn last year, up from an operating loss of €73mn in 2021.

The company has shed some of its businesses and pulled out of countries including Denmark, Serbia and Sweden following a strategic review to “refocus” the business in 2020 and 2021. 

The expected transaction would come amid a series of transport deals that have seen some of the UK’s biggest listed rail and bus companies taken private. 

I Squared Capital is a global long-term investor in various sectors such as energy and telecommunications in addition to transportation. It has made previous acquisitions in the sector such as the 2018 deal for trailer leasing firm TIP.

The group’s executives have said they see an opportunity in areas such as the electrification of urban transportation. I Squared made an effort to buy the UK’s First Group last year, though a £1.23bn bid for the rail and bus operator was rejected as “significantly undervaluing” the company.

Go-Ahead accepted a takeover bid of roughly £650mn from an Australian bus operator backed by international pension funds in June 2022. And separately on Thursday, Go-Ahead announced the sale of its German rail business to Austria’s state railway ÖBB, without disclosing financial details.

Stagecoach agreed to a £595mn bid from German asset manager DWS in March last year, a move that scuppered a separate takeover offer by National Express. 

Industry executives believe the sector will benefit from initiatives by governments around Europe to cut car use and promote public transport to help reach net zero carbon emissions. There is also a shift in the UK market towards longer-term contracts, which can be attractive to infrastructure investors. 

I Squared declined to comment. Deutsche Bahn in a statement declined to confirm details of the deal, but said it wants to divest Arriva by the end of 2024. 

“The process is ongoing and we have made significant progress over the past two years. We have already sold operations in several countries,” the company said.