It was one of those skirmishes where both sides could claim victory. After some testy verbal exchanges with its largest shareholder in the run-up to a showdown vote last month, First Group emerged with its boardroom almost entirely intact and the majority of its investors onside.
At the same time, Coast Capital, the New York-based hedge fund that had convened the meeting for the vote, garnered enough support among other disillusioned shareholders to ensure the departure of the FTSE 250 transport group’s chairman, Wolfhart Hauser, 69.
Yet the voting run-in over the board’s composition at First Group was the precursor to what looks like a more gritty pathway ahead for the bus and rail operator, one that may contain a few more bumps and potholes.
First Group traces its history back to 1986, when Grampian Regional Transport Limited was formed to own and manage the council’s bus fleet in Aberdeen in the wake of legislation that deregulated Britain’s local bus market. After a stock market listing in 1994 and a move into rail in 1996, the company renamed itself First Group in 1997 and entered the American market through an acquisition in 1999.
The group, which still has its headquarters in Scotland, operates one in five buses in the UK and the Greyhound intercity coach network and yellow school buses in America. In rail, it runs Great Western Railway, South Western Railway and the Trans Pennine Express and is part of a consortium bidding for the west coast main line franchise that is up for grabs. Employing about 100,000 staff in total, its revenues last year topped £7.1 billion and its stock market quotation gives it a value of £1.27 billion.
Standing back, First Group feels like three separate businesses — UK buses, US buses and coaches and UK trains — that do not necessarily need fit to together. Yet nor do they particularly scream to be torn apart.
Greyhound has been problematic for First Group since it acquired the business in 2007, fighting what looks like an increasingly uphill struggle to retain market share in the face of the rise of low-cost short-haul airlines. The business of transporting America’s children to their schools in their distinctive yellow buses each day trundles along nicely, however, as do the airport shuttle services and worker transport runs that First Group does in the United States.
The UK buses division, a big player in regional cities such as Bristol and Sheffield but not operating in London, has performed passably, but it has struggled over the years to increase revenues and to lift its operating margin.
As for rail, the contracts have been mixed: GWR has been profitable, the Trans Pennine franchise has consistently produced losses and South Western Railway has been mired in disruptions and disputes with unions over, among other things, driver-only trains. In the background, however, is a franchising system that is clearly in crisis: operating contracts have been bought variously in and out of government hands in recent years and there are big questions about the appropriate tenures and terms to impose on operators.
Most recently, the Department for Transport has found itself locked in a legal dispute with operators including Stagecoach and Virgin Trains, which claim to have been barred from pitching as part of a row over which party should take on open-ended pension liabilities. The situation has become so dire that the government has appointed Keith Williams, 63, chairman of Royal Mail, to carry out a root-and-branch review into the entire rail industry, the conclusions of which are expected some time in the autumn.
With all of this movement going on, it is frankly unsurprising that Coast Capital used the 10 per cent stake that it had amassed in the company to call for a break-up and to seek the removal of half a dozen of the directors.
It might be tempting to conclude that it was pressure from Coast Capital that brought about First Group’s decision in May to begin the process of separation. The more likely reality is that work in the background had been going on for some while, not least because the hedge fund vehemently disagreed with the way in which First Group proposed to split.
The transport group said that it proposed becoming a US-focused business, concentrating on First Student, where the yellow buses sit, and First Transit, the shuttles operator, but offloading the troublesome Greyhound.
It said that it also planned to leave the UK bus market. Its circumspection about rail has been widely seen as signalling a desire to let the contracts run out and not rebid, but in reality no firm decision is likely before the outcome of the Williams review, which could come out in operators’ favour. For what it’s worth, Coast Capital wanted First Group to ditch rail, keep UK buses and spin off or list the US divisions.
Either way, what follows is going to be tricky. There surely can be no job-lot sale of the British buses to an industry rival because of competition concerns, so First Group’s exit is likely to be piecemeal, through local deals. The buses division also carries onerous pension liabilities, which are likely to deter buyers.
Assuming that it did decide to alight from rail, that process would hardly be swift and easy. Its contract obligations mean that it can’t simply turn off the trains, send its drivers home and tell them not to come to work the next day. It has already taken sizeable provisions against some of the rail contracts, suggesting that they are hardly performing as it had hoped and probably lessening their allure to any buyer.
In the US, given that it’s pretty much a dead cert that most Americans will prefer a short-hop flight to a gruelling 21-hour ride on a coach, it would be little surprise if the group struggled to find a willing buyer for Greyhound. That leaves the bus and shuttle operations, which are established and effective as they stand but are hardly replete with dramatic growth options.
With Coast Capital showing no signs of leaving the register, management are clearly going to be under pressure to deliver. And they may yet produce rabbits. In the meantime, First Group’s shares, which carry no dividend, are labouring. Off 1p, or 0.9 per cent, at 103½p yesterday, the stock trades at 7.2 times Liberum’s forecast earnings. With any potential release of value likely to be painstaking, they are probably best avoided.
ADVICE Avoid
WHY Separation plans look sensible, but releasing value will not be easy and the shares probably will remain under pressure
