By Maria Sheahan and Rhys Jones
FRANKFURT/LONDON (Reuters) - Germany's Siemens AG promised investors its deal to buy Invensys' rail business for a hefty 1.74 billion pounds ($2.78 billion) would contribute to boosting profits in a tough economy.
The engineering conglomerate, Germany's most valuable company, aims to save 6 billion euros ($7.75 billion) and focus on its core areas of expertise to close a gap with rivals such as ABB and General Electric.
Late on Wednesday, the company said it was buying Invensys Rail and selling its baggage handling and postal sorting operations as part of that plan.
The deals will lift the operating profit margin of Siemens' Infrastructure & Cities division by more than one percentage point in fiscal 2014 from 7.5 percent last year, I&C Chief Executive Roland Busch said during a conference call on Thursday.
"We are investing in our profitability. We see a margin improvement ... as validation," Busch said.
The purchase of Invensys Rail vaults Siemens, which was advised on the deal by Goldman Sachs, well ahead of rivals in rail signaling, with a 17 percent market share, almost double the closest rivals Alstom and Ansaldo STS.
The 1.74 billion pound price tag represents about 97 percent of parent company Invensys' market value ahead of Wednesday's announcement, or 15 times Invensys Rail's estimated 2013 operating profit, which analysts said seemed very high.
"We like the strategic intent of the deal, but we do not like the pricing: the value is going to Invensys shareholders," Bernstein Research analysts said.
The deal gives Invensys cash to pay down its pension deficit, return money to investors and re-focus its business on industrial software, systems and control equipment.
Invensys shares closed 27 percent higher following the announcement on Wednesday and were up 9.64 percent at 307.03 pence by 5:52 EDT on Thursday. Siemens was up 0.8 percent at 79.57 euros.
Analysts have long expected Invensys to sell off some of its business units because suitors interested in a takeover of the entire group were put off by its hefty pension deficit, which stood at a net 426 million pounds at the end of March. Analysts had said the total liabilities were far higher than that.
Charles Stanley analyst Rae Ellingham believes Invensys may now be a more attractive takeover target, after the bulk of its pension problems were solved by the Siemens deal. The broker has since raised its recommendation on the stock to 'accumulate' from 'hold'.
Earlier this year, Invensys said it had received a "highly preliminary" approach from U.S. group Emerson Electric, but talks had ended. China South Locomotive has also reportedly studied a bid for Invensys.
Siemens I&C chief Busch said the German company has been eyeing Invensys Rail for a decade already and pounced on it now because it saw an opportunity to buy it without taking on future pension liabilities.
(Editing by Hans-Juergen Peters)