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Deutsche Bahn to work with Deutsche Bank, Citi on Arriva sale - sources

FILE PHOTO: A locomotive engine of German railway Deutsche Bahn is seen at the main train station in Frankfurt, Germany, March 27, 2019. REUTERS/Kai Pfaffenbach/Firle Photo

By Arno Schuetze and Markus Wacket

FRANKFURT (Reuters) - German railway operator Deutsche Bahn has picked Deutsche Bank and Citi as advisors on its potential sale or flotation of British unit Arriva, people close to the matter said on Thursday.

Deutsche Bahn said last week it was exploring the sale of Arriva - expected to be valued at more than 3 billion euros (2.56 billion pounds) - adding this would enable the group to lower its debt pile.

Deutsche Bahn and the banks declined to comment.

Deutsche Bahn has come under pressure to plug a funding gap and has said that a sale or listing could help it limit the rise in debt levels and give Arriva - which it bought in 2010 - financial leeway for growth.

Deutsche Bahn's net debt stood at 19.55 billion at the end of 2018 and the company had said that a complete or partial sale or a listing could take place until year-end.

Arriva, which employs 53,000 across Europe, generated adjusted earnings before interest, tax, depreciation and amortisation of 575 million euros in 2018 on sales of 5.44 billion.

British peers Go-Ahead, Stagecoach and National Express trade at 3.5 to 7.5 times their respective core earnings.

People familiar with the industry said that an outright sale is more likely than an initial public offering given the current state of capital markets and uncertainty tied to Britain's departure from the European Union.[nL5N208701]

"This is a play for private equity groups, for the long-dated funds with slightly lower return expectations or for infrastructure funds," a person familiar with the matter said, adding that in a potential sale the company may be valued at more than 8 times its expected core earnings.

Last year, U.S-based Global Infrastructure Partners (GIP) bought Italy's high-speed train operator Italo for 2 billion euros.

Arriva has three units, a UK rail division, a European rail unit and bus operations in all of Europe, which will catch the attention of different sets of investors, the sources said.

"The bus ops are clearly the most interesting parts," one of the people said, adding that Deutsche Bahn is expected to shop it to British groups such as GoAhead, National Express and First Group as well as France's SNCF unit Keolis or Germany's Transdev, 34 percent owned by the Rethmann Group.

The European rail operations are expected to attract interest from infrastructure investors, such as those who may bid for a stake in German rail group Netinera.

Cube, the seller of a 49 percent stake in Netinera is planning to send out information packages on the asset before Easter, people close to the matter said.

"Finding a buyer for Arriva's UK rail operations may be the biggest challenge, as the interest of its British peers may be limited," one of the people said, adding that infrastructure investors are seen as possible buyers.

(Reporting by Arno Schuetze editing by Thomas Seythal, Thomas Escritt and Alexandra Hudson)