TRANSPORT group Arriva is to make its first foray into the German transport market with the purchase of a rail company.

The train and bus operator, based in Sunderland, bought Prignitzer Eisenbahn Gruppe (PEG) for £4m, subject to clearance by the German competition authorities.

Arriva said the move would provide it with an excellent foundation in the increasingly liberalised German rail market, where regional and local authorities are putting subsidised services out to tender.

Arriva, which runs rail services in the North-East of England and Wales, already operates trains in Jutland, in Denmark, and Groeningen, in Holland. It is one of only two UK operators operating rail services in continental Europe. Arriva chief executive Bob Davies said: "The German public transport market is the largest in Europe, with the rail sector moving rapidly to a competitive tendering environment and the bus sector, is expected to follow suit.

"The acquisition provides an excellent foundation in a potentially significant market for Arriva."

PEG employs about 250 people and runs rail services in the federal states of North Rhine-Westphalia, Brandenburg and Mecklenburg-West Pomerania.

It operates three rail franchises and by the end of the year, will be operating five - two which will be joint ventures.

Last year, it made operating profits of £500,000 on turnover of £20.2m.

Arriva runs the Arriva Trains Northern franchise in the North-East of England and began operating the new Wales and Borders franchise in December.

The group was already Denmark's single biggest bus operator before it won the right to run Danish rail services in January 2002.

It took over passenger rail services in much of central and northern Jutland from state-owned railway DSB, representing 15 per cent of Denmark's passenger rail network, on a seven-year contract.

The company faced criticism from the Danish authorities and newspapers after it initially underestimated the number of drivers it would need and had to cancel trains or replace them with buses.

The problems were overcome when DSB took back temporary control of part of Arriva's network, giving the UK company time to train drivers.

Arriva shares closed down 4p at 373p.