(Adds comment from Deutsche Bahn)
By Pamela Barbaglia, Arno Schuetze and Harry Brumpton
LONDON/FRANKFURT/NEW YORK, June 5 (Reuters) - U.S. buyout fund Carlyle and German asset manager DWS are gearing up to bid for British rail and bus firm Arriva after holding preliminary talks with its German owner Deutsche Bahn, sources familiar with the matter told Reuters.
An auction process led by Deutsche Bank and Citi is expected to kick off in mid June, four sources said, valuing the Sunderland-based business at about 3.5 billion euros ($3.94 billion).
Deutsche Bahn, which bought Arriva in 2010, needs to free up cash to slash its debt pile and revive growth.
The German firm sees a sale of Arriva as its main priority but it could also pursue an initial public offering (IPO) to maximise its price, the sources said.
U.S. private equity firm Apollo and France's SNCF unit Keolis are also working on making rival offers for Arriva, the sources said.
Deutsche Bahn wants to receive indicative bids before the summer break with a view to entering exclusive talks with a preferred bidder in late September or early October, one of the sources said.
Alexander Doll, a member of Deutsche Bahn's management board for finance, freight transport and logistics, confirmed in a statement that Deutsche Bahn had started a dual track process to explore the option of selling up to 100% of the shares in Arriva to one or more investors, as well as the option of pursuing an IPO.
"The process started off well with many parties having expressed their interest," he said. "As the dual track process continues over the next months we do expect more substantiated feedback."
DWS plans to bid as part of a consortium and is currently sounding out other financial investors, one of the sources said.
DWS and Keolis declined to comment. Apollo and Carlyle were not immediately available for comment.
Arriva, which employs 53,000 people across Europe, runs British rail franchises including Northern and the London Overground as well as buses around the country.
It generated adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of 575 million euros in 2018 on sales of 5.44 billion euros.
British peers Go-Ahead, Stagecoach and National Express trade at 3.5 to 7.5 times their respective core earnings.
Deutsche Bahn, whose net debt stood at 19.5 billion euros at the end of 2018, aims to cash out for as much as 4.5 billion euros, one of the sources said.
However, interested parties have a more conservative approach to its valuation and are pricing the asset at 3 billion to 3.5 billion euros, the sources said.
Deutsche Bahn kicked off a strategic review of the business earlier this year amid growing pressure to plug a funding gap.
Arriva consists of three units - a UK rail division, a European rail unit and bus operations in all of Europe - and while the likes of Go-Ahead, Stagecoach and National Express may try to bid for specific assets, Deutsche Bahn wants to market it as one business and is against a piecemeal deal.
Arriva's European rail operations compete with Netinera, the German rail subsidiary of Italy's Ferrovie dello Stato, which is currently looking for a new investor.
Investment firm Cube bought a 49% stake in Netinera from Arriva in 2011 and is in the process of flipping it to another investor, with offers due in mid June, while Ferrovie wants to hold on to its majority stake. ($1 = 0.8889 euros) (Reporting by Pamela Barbaglia, Arno Schuetze and Harry Brumpton; Additional reporting by Markus Wacket in Berlin; Editing by Jan Harvey and Susan Fenton)