HS analysis VR Group, which set off for purchases in Sweden, could have hit just the right moment as German DB scorches

State public transport company VR Group said last Thursday to buy from the German bus and train operator Arriva Sverige in Germany, Deutsche Bahn (DB).

It is a loss-making company with 3 800 employees, the third largest train operator in Sweden and the fourth largest bus operator.

The question is: what will cause the state-owned VR to pour an estimated EUR 100 million into such an acquisition? If the market is good, why did DB want to give it up?

Read more: VR Group acquires Swedish bus and train operator for less than 100 million – 3,800 new employees, almost doubling VR’s headcount

Reply it is worth looking first at VR Group’s own situation and strategy.

The starting point for the transaction has been that VR’s business in Finland cannot grow much due to its high market share and demographic development. We are on the road to contraction sooner.

In Finland and the European Union, competition between railways and public transport has increased year by year over the last ten years, and competition for rail transport is becoming more common.

VR’s exclusive right to operate rail services expired on 1 January 2021. Since then, anyone has been able to invest in trains and apply for a license to operate rail services.

At VR Group may also be given to Swedes.

When Helsinki Region Transport (HSL) competed with bus companies for the operation of commuter transport in the Helsinki metropolitan area in 2018, VR Group’s offer was made for electric buses instead of diesel buses. They were more environmentally friendly and also cheaper to use.

“The market changed overnight,” said VR Group’s Director of Passenger Traffic Topi Simola said at a trade press conference.

Since HSL’s tender, Pohjola Traffic, which is owned by VR, has not purchased any diesel buses, and environmentally friendly electric buses have won tenders since then.

Now that few years’ lead in the use of electric buses is to be exploited in the conquest of the Swedish public transport market.

VR Group has been thoroughly researching the matter and, in accordance with its strategy, has been looking for ways to seek growth in passenger traffic abroad with controlled risks for a couple of years now, Topi Simola tells HS.

“Such a path through acquisition and organic growth was the safest route.”

In competitions The Nordic countries appear to be a common market for operators.

In Sweden and Norway, the most active competitors have been the Swedish state-owned SJ and the Norwegian state-owned VY, as well as the British listed company Ah Ahead.

In Europe, rail transport has opened up in some countries in the past.

Once the market has opened up, state-owned companies have begun to expand. For example, the German DB and the French SNCF have sought growth abroad.

Simolan according to public transport tenders, competitors can be divided into three groups.

The majority of competitors are state-owned railway companies such as VR and their subsidiaries, which often operate under different names.

The second group is the British operating companies that have been operating on the British privatized railways for a long time.

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Why, then, did Deutsche Bahn abandon Arriva Sverige if its prospects are so promising?

The third group consists of venture capitalists who are particularly interested in transport solutions for the green transition, as there are good investors for such projects.

For example, in Sweden private equity investors bought the bus company Nobina and Finland Capman bought Koivisto Car.

Arriva Sverige operates 100% in a market competed locally by municipalities.

In these tenders, municipalities or local operators typically bear the risk of ticket revenue, or at least a large part of it, so that it is up to the route operators to run the promised services on time.

Often the contracts are long, for example ten years, and the winner buys completely new equipment for operation.

The larger the number of buses the operator buys, the cheaper and tailor-made the cars get.

The large size of the company also helps in the development of artificial intelligence applications. They are used to optimize the number of equipment and personnel.

According to Simola, the size of public transport companies is growing with the acquisitions, so that the market is divided between a few players in different regions.

Arriva in Sweden has a lot of experience in rail racing.

VR hopes to be able to take advantage of this experience as competition intensifies in Finland. In return, it can bring the expertise in e-bus transport accumulated in Helsinki and Tampere, where Sweden is clearly behind Finland.

Many trends in Sweden also promise good for public transport. In Sweden, the population is growing, urbanization is continuing and political decisions promise large investments in rail and public transport, already for environmental reasons.

Why Deutsche Bahn then abandoned Arriva Sverige if its prospects are so promising?

The acquisition of Fortum’s German Uniper from Germany inevitably comes to mind. It sold the giant company “cheaply”, but the risks of the deal have since materialized for Fortum in many ways.

One explanation is that the company was making a loss and wanted to get rid of it.

Another and perhaps better explanation is that DB is a rather indebted company.

It also owns the German railway network, which needs major repair investments.

A lot of money is needed for these investments, and therefore for example DB the large logistics company DB Schenker has been put up for sale. Price tag is EUR 20 billion.

Arriva Sverige’s sales can be included in the same group.

DB tried to list its entire Arriva subsidiary, which in addition to Sweden had studios from Britain, the Netherlands and continental Europe.

That listing was apparently canceled due to the low level of investor interest and valuation, and then it was decided to put the various parts of the company up for sale.

DB gave Arriva Sverige was ordered two years ago to abstain from new public transport tenders. This order, which significantly slowed down the company’s growth, was probably made because there was no longer a desire to invest in new equipment due to tenders until the company was sold.

Arrived by VR Group, Arriva can once again participate in public transport tenders and grow.

In competitions, the race is tough and margins are low, but in the hands of a long-term owner, Arriva Sverige should now have a better chance of growing.

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As owners of VR Group, we Finns have reason to hope that the timing and happiness of the transaction were right.

The purchase price of Arriva Sverige was not published, but the price is estimated to be in the category of VR’s annual maintenance costs. Last year, VR’s total maintenance cost EUR 186 million, ie the purchase price is probably around EUR 200 million.

That, too, is a lot of money, but everything is relative.

By comparison, VR Group is investing more than EUR 500 million in the renewal of IC wagons in Finland alone.

What about how active was the Finnish state in trade?

Minister for European Affairs and Corporate Governance Tytti Tuppurainen (sd), the Board of Directors of VR Group independently decided on the acquisition of Arriva Sverige in accordance with good corporate governance, as it does for other investments in the company.

“And therefore they also have a risk assessment,” Tuppurainen says in an email to HS.

Tuppurainen reminds that in accordance with the decision-in-principle of corporate governance, all companies are required to identify potential corporate responsibility risks in their own operations and throughout the value chain.

VR Group As owners, we Finns have reason to hope that the timing and happiness of the deal were right. At least several factors argue that the deal was worth doing.

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