Finmeccanica agrees potential 1.9 bln euro twin-track rail sale with Hitachi

By Danilo Masoni and Valentina Za

MILAN (Reuters) - Italian conglomerate Finmeccanica has agreed to sell its rail assets to Japan's Hitachi in a potential 1.9 billion euro ($2.15 billion) deal that will cut its debt by 15 percent and help it to refocus on aerospace and defence.

Hitachi, meanwhile, will gain a stronger foothold in Europe to compete with bigger rivals such as Germany's Siemens and France's Alstom, having already relocated its rail division to London last year.

State-controlled Finmeccanica had been trying to sell its loss-making train business AnsaldoBreda and a controlling stake in rail-signalling company Ansaldo STS for almost four years.

However, corruption scandals and political meddling delayed the process, prompting ratings agencies to downgrade the Italian group's 4.1 billion euros of debt to junk status, increasing its financing costs and damaging its international competitiveness.

The Hitachi deal, which Finmeccanica said will cut its debt by 600 million euros, is likely to boost investor confidence in the ability of CEO Mauro Moretti to deliver on its busines plan. Moretti had been chosen last year by Prime Minister Matteo Renzi to lead the company's turnaround.

The plan, presented to investors in January, aims to cut net debt to less than 3.5 billion euros by 2017, helped by a withdrawal from unprofitable projects and a possible sale of its U.S. business DRS Technologies.

For Hitachi the main focus of the deal is Ansaldo STS, a profitable business that would help it to sell combined carriage and signals packages as well as giving it a manufacturing presence in continental Europe.

Shares in Finmecccanica rose after news of the deal, which had been leaked by sources late on Monday, but turned negative by mid-morning on Tuesday.

BONDS RISE SHARPLY

At 0906 GMT the stock was down 3.6 percent at 10.92 euros, having risen more than 6 percent in the previous session, while the company's bonds were sharply higher.

Finmeccanica has about 5 billion euros of outstanding bonds, with coupons ranging from 4.375 percent to 8 percent.

Its most recently issued bond -- a 950 million euro 4.5 percent note maturing in 2021 -- tightened from a bid yield of 2.26 percent to a record low of 2.04 percent in the secondary market, according to Tradeweb.

Hitachi will pay 773 million euros for a 40 percent stake Finmeccanica owns in signalling unit Ansaldo STS, the companies said in a joint statement.

The Japanese company will pay 9.65 euros for each Ansaldo STS share and launch a mandatory offer to buy all the remaining shares. If all minority shareholders tender their shares, the overall price will rise to a little more than 1.9 billion euros.

The price represents a 9.2 percent premium to the stock's closing level on Monday.

Hitachi will also pay 36 million euros for Finmeccanica's AnsaldoBreda train business, excluding certain residual contracts and other activities that need revamping.

"It remains to be seen what is the possible negative value of AnsaldoBreda's residual contracts ... but there's no doubt on the positive impact (for Finmeccanica) of the overall agreement," Banca Akros analyst Gabriele Gambarova said.

($1 = 0.8835 euros)

(Editing by David Goodman)