4th UPDATE: Arriva In Merger Talks With Keolis

U.K. bus and rail operator Arriva PLC (ARI.LN) Thursday said it's in preliminary talks with state-owned Societe Nationale des Chemins de fer Francais, or SNCF, about a possible merger with France's public transport operator Keolis.

Arriva said talks are at an exploratory stage and cautioned there is no certainty an agreement will be reached.

The talks with SNCF center on the "possible contribution of all or part of Keolis' transportation business to Arriva to create a significantly enhanced and leading European transportation business focused on the increasing liberalization of the transportation market in Europe."

Keolis' shareholders are a consortium of French insurer Axa SA (AXA), through Axa Private Equity, and Canadian investor Caisse depot et placement du Quebec. The consortium has a 52% stake. SNCF has a 45.5% interest with key Keolis managers holding the remaining 2.5%.

SNCF wasn't immediately available for comment and Axa didn't return calls. Keolis didn't respond to emails or calls.

Keolis is a minority partner with Go-Ahead Group PLC (GOG.LN) in Govia, which runs Southern, Southeastern and London Midland rail franchises in the U.K. It also operates the TransPennine Express rail franchise in partnership with FirstGroup PLC (FGP.LN).

In 2008, Keolis carried some two billion passengers and recorded revenue of EUR3.3 billion. It employs some 36,000 people across 11 countries. About 44% of its business is outside France.

In comparison, Arriva posted a revenue of GBP3 billion for 2008 and employs 44,000 people across 12 European countries.

Only last year, Keolis was pipped at the post by Veolia Environment SA (VE) to merge its Veolia Transport unit with public transport group Transdev, in which French state-owned investment business Caisse des Depots et Consignations was selling its 70% stake.

"Deutsche Bahn's attempted IPO in 2008 really made SNCF think about its own international ambitions, and general belief has been that it has lagged its German peer on this front and needs to play catch-up, fast," said Olivetree Securities analyst Mark Kelly.

"Realistically, the U.K.-listed bus and rail stocks are the only materially sized businesses listed anywhere in the world, and with their own recent international expansions they provide SNCF with a tailor-made bolt-on prospect," he said.

"This isn't a story about synergies, it's about building SNCF's international presence and Arriva brings that nicely. Arriva's shareholder base is very open, free float is virtually 100% and the top 15 shareholders--all institutions--own close to 75% of the equity and its assets are very complimentary to that of Keolis, the vehicle used by SNCF," Kelly added.

At 1551 GMT, Arriva's shares traded up 16 pence, or 3.5%, while the FTSE 250 Index traded flat. The shares have gained 7.9% in value in the past 12 months. The company has a market capitalization of GBP964 million.

-By Kaveri Niththyananthan, Dow Jones Newswires; 4420 7842 9299; kaveri.niththyananthan@dowjones.com

(Matthew Curtin in Paris contributed to this article.)

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