Author Topic: Break up of FirstGroup?  (Read 499 times)

Offline Spoddendale

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Break up of FirstGroup?
« on: April 29, 2018, 10:34:11 pm »
'Passenger Transport' dated 26 April 2018 carried a report which opens with:

The break-up of FirstGroup is being predicted by City analysts and in the transport industry following a preliminary takeover bid from North American private equity investor Apollo Asset Management.

http://www.passengertransport.co.uk/2018/04/firstgroup-break-up-likely-after-apollo-bid/

David
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Offline Coast_Hopper

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Re: Break up of FirstGroup?
« Reply #1 on: April 29, 2018, 11:11:21 pm »
'Passenger Transport' dated 26 April 2018 carried a report which opens with:

The break-up of FirstGroup is being predicted by City analysts and in the transport industry following a preliminary takeover bid from North American private equity investor Apollo Asset Management.

http://www.passengertransport.co.uk/2018/04/firstgroup-break-up-likely-after-apollo-bid/

David

Makes interesting reading

http://www.passengertransport.co.uk/2018/04/firstgroup-break-up-likely-after-apollo-bid/

Quote
FirstGroup break-up likely after Apollo bid
by PASSENGER TRANSPORT on Apr 26, 2018 • 3:50 pm

Although group rejected initial takeover bid as ‘opportunistic’, major changes are expected – especially at under-performing UK bus division

The break-up of FirstGroup is being predicted by City analysts and in the transport industry following a preliminary takeover bid from North American private equity investor Apollo Asset Management.

Although First rejected an initial approach from Apollo as “undervaluing the company” and “opportunistic”, major changes are expected regardless of whether Apollo comes back with a successful bid.

Analysts said First’s continued inability to deliver a substantial recovery across its US and UK divisions, following a £615m funds injection from shareholders in 2013 to pay down debt and invest in new buses, indicated that the task of turning round multiple underperforming businesses was “too big and too complicated”.

There has been a marginal improvement in the large US school bus division’s performance during that period. However, the UK bus division has failed to approach the profit margins achieved by other transport groups, the Greyhound coach business has faltered in the face of intense competition from airlines and cheaper car travel, and the finances of UK rail franchises are under pressure from lower than expected growth.

“Either way, it will not be business as usual, when this reaches its conclusion,” a longstanding City analyst told Passenger Transport. At a minimum, Apollo is expected to exit the UK rail business due to political unease at private equity ownership of franchises. Sale or closure of the worst performing UK bus businesses is also predicted in order to create a higher potential UK bus division.

Assuming FirstGroup sees off any new approach from Apollo, the minimum sales expected are a major, possibly all of, the UK bus business plus Greyhound, both of which require substantial capital investment and management attention. Greyhound could also face further pressure from rumoured competition from private equity-funded coach business Flixbus which analysts said First does not have the resources to compete with.

“Apollo will certainly have plans for what needs to be done, and if the management retain control, investors will be wanting to know what Plan B is, to provide some value because the turnround has not worked,” the analyst said.

The bid for First was not unexpected in the transport industry. David Leeder, managing partner of Transport Investments Ltd and former FirstGroup plc main board director, said that the group’s failure to pay a dividend for the past five years along with its declining share price meant it was effectively a “zombie business” whose function had been to meet is pension fund liabilities, provide management salaries and repay debt rather than provide a return to investors.

He said that factors that were likely to have prompted a bid included forthcoming expiry of debt bonds, which provides the opportunity to refinance on cheap rates, and low UK rail growth, which could prove to be “the final nails in the zombie’s coffin”.

“If you look at what has changed to prompt a bid, those are the factors,” he said. “If the rumours that they are in trouble and facing losses at South Western and TransPennine are true, that must place them in a very difficult position. If you look at their performance in other divisions, you have to ask how they can make it all work if the franchising market means they can’t win contracts on profitable terms.”


First’s UK bus division set for major changes


Significant action to reshape First’s UK bus division will be considered in the wake of Apollo’s interest in the company, industry sources have predicted.

One of the UK bus industry’s most experienced managers told Passenger Transport that the case for substantially reducing the size of the division to create a more profitable and manageable business is highly likely to be revisited. He considered that private equity ownership of most, or all, of First UK Bus is a likely outcome, regardless of whether Apollo ultimately buys FirstGroup, due to the need for a new management perspective.

He recalled that in 2013 First had been looking to sell low profit and loss-making companies amounting to around half its UK bus business, but had not been able to dispose of a large number of its worst performing operations which had distracted from the turnround plan for the bus division and contributed to failure to meet profit targets.

The type of turnaround needed is more likely to come from a private equity owner who can do the ruthless and objective thing out of the public gaze and without having to issue trading statements every three months

“At that time, First correctly identified that they needed to sell half the UK bus business to concentrate resources on the areas where there was most potential, but they hit a situation where no one would buy the worst of those companies,” he said.

“Then they weren’t brave enough to close the ones they couldn’t sell and tended to soldier on. They are now at a stage with UK bus where the type of turnaround needed is more likely to come from a private equity owner who can do the ruthless and objective thing out of the public gaze and without having to issue trading statements every three months.”

One thing I will point out is what they have with the X1, rebranded it to XL and there are timetables at every stop now whereas before they didn't bother, makes me wonder if something is going on behind the scenes whether it's to do with this or whether they are looking to sell the X1

(copied the body of the report in case the link is broken in a few months time)
« Last Edit: April 29, 2018, 11:18:12 pm by Coast_Hopper »

Offline Spoddendale

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Re: Break up of FirstGroup?
« Reply #2 on: April 30, 2018, 06:22:21 am »
Good idea to copy and post the full report Paul. I never thought of that, something to remember for the future.

David
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Offline Spoddendale

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Re: Break up of FirstGroup?
« Reply #3 on: May 12, 2018, 06:22:10 am »
'RouteOne' magazine (10 May) tells that Apollo has decided against acquiring First Group

http://www.route-one.net/articles/Apollo_walks_away__FirstGroup_takeover_abandoned?utm_source=routeone+Master+Subscribers&utm_campaign=e350200b92-EMAIL_CAMPAIGN_2018_05_10&utm_medium=email&utm_term=0_584b65a2d5-e350200b92-99101569

Quote

Apollo abandons FirstGroup takeover aspirations
US-based private equity firm offers no reason for dropping its plans for takeover of transport giant


US equity fund Apollo has abandoned its planned takeover of FirstGroup
US private equity fund Apollo Global Management has walked away from plans to make a bid to take over FirstGroup.

On April 11, Apollo made what the Aberdeen-based transport giant describes as two “preliminary and highly conditional indicative proposals… relating to a possible cash offer for the entire issued and to be issued ordinary share capital.”

FirstGroup considered Apollo’s undisclosed proposals “opportunistic” and it believed that they “fundamentally undervalued” the company.

They were accordingly rejected unanimously by its board. British law meant that Apollo then had until 9 May to either make a firm offer for FirstGroup or walk away.

The equity fund has not offered any reasons why it dropped its plans. FirstGroup shares slumped by 10% following Tuesday’s announcement; they had climbed by an initial 7.4% when Apollo’s interest was first disclosed.

FirstGroup’s board says that it “continues to believe in the strong prospects for shareholder value creation available to the company.” The group has not paid a dividend since 2013 and it has lost 40% of its value over that period.

FirstGroup will publish its full year results for the year to 31 March at the end of this month and it will further update on the company’s outlook at that time.

At the time of Apollo’s initial approach, analysts suggested that FirstGroup is undervalued, with recent poor performance having caused the market to overlook its leading or near-leading positions in its main areas of activity. The group currently has a market value of £1.2bn.

However, one analyst added that were it not possible for an organic turnaround of FirstGroup to take place in full, investors would hope for “transactional alternatives to crystallise value, whether initiated by management or external parties.”

Others have added weight to the theory that the cash approach from Apollo could force FirstGroup to act, which may include a break-up of the company.

Unquote

David
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Offline TCD813

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Re: Break up of FirstGroup?
« Reply #4 on: May 13, 2018, 06:18:43 pm »
It looks like the deregulated model for bus service provision is broken.

The real competition is the private motor vehicle and only an integrated service, involving a single operator in most areas, with jointly-operated routes in areas of territorial overlap, can be viable. The regulatory need to reflect that.

First to exit Clacton and close depot with 60 jobs to go

Quote from: RouteOne
[First's] seven days a week Clacton-Colchester and Clacton-Walton-on-the-Naze routes will continue.
First says its Clacton operation “has not been viable for several years.”
It faces competition from Go-Ahead owned Hedingham, which has a network of five Clacton town routes, and a route to Colchester.
Hedingham says it is planning to replace First’s routes.

Note that First would be unable – under current competition law – to sell its operations to another major – in this case GoAhead. Though a sensible system would see major operators legally exchanging depôts and routes, with fares reviewed by a regulator, or municipalities stepping in.
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Offline dwarfer1979

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Re: Break up of FirstGroup?
« Reply #5 on: May 14, 2018, 08:40:52 am »
It looks like the deregulated model for bus service provision is broken.

The real competition is the private motor vehicle and only an integrated service, involving a single operator in most areas, with jointly-operated routes in areas of territorial overlap, can be viable. The regulatory need to reflect that.

First to exit Clacton and close depot with 60 jobs to go

Note that First would be unable – under current competition law – to sell its operations to another major – in this case GoAhead. Though a sensible system would see major operators legally exchanging depôts and routes, with fares reviewed by a regulator, or municipalities stepping in.
There is nothing in competition law to stop First selling Clacton to Go-Ahead, the issue is the Competition Authorities would be expected to investigate before approving (because of the share of the market Go-Ahead would end up with) and they charge the businesses merging the cost of an investigation which for a small sale like Clacton would probably make the deal unaffordable for both parties (as happened between Stagecoach & First in North Devon, the sale wasn't blocked it was just neither party was prepared to pay for the investigation given the value of the transaction).  It is certainly quite conceivable, given the continued presence of First in the area coming in from neighbouring areas & also Stephensons plus the small size of Clacton on a national scale, but the cost & hassle for First may be more than they are prepared to take.