London-based Invensys plc, in a statement, said the sale follows a strategic review which concluded that consolidation in the signaling industry would limit the scope for expanding the company's rail activities.
The disposal, which has been agreed on a cash free/debt free basis, is still subject to shareholder approval at Invensys' general meeting next month and subject to regulatory consent, with completion expected in the second quarter of next year.
Invensys notes that Invensys Rail has made significant progress in recent years expanding its business outside Britain, its traditional core market, to the extent that new markets including Spain, Australia, and North America now account for 64% of its order book. But Invensys says consolidation in the signaling industry meant there is only limited scope for increasing the size of the rail business.
"The key issue with consolidation is that rolling stock manufacturers would be reluctant to part with key assets in signaling, so we would only have very limited ability to become the consolidator," says Invensys CEO Wayne Edmunds. "We therefore decided to seek a partner and Siemens was an easy choice being a clear leader in the signaling market."
For its part, Siemens AG told investors its acquisition would bolster profitability, and help the company compete with rival manufacturers such as Fairfield, Conn.-based General Electric Co. and Zurich, Switzerland-based ABB.
The deal will help lift the operating profit margin of Siemens' Infrastructure & Cities division by more than one percentage point in fiscal 2014 from 7% last year, I&C Chief Executive Roland Busch said during a conference call on Thursday.
Invensys earlier had indicated it had been considered by other suitors, including Emersom Electric and China South Locomotive. Siemens' Busch said his company had been pondering acquisition of Invensys Rail for a decade, making the move now as it saw an opportunity to buy Invensys without taking on future pension liabilities.