🚀 AI-picked stocks soar in May. PRFT is +55%—in just 16 days! Don’t miss June’s top picks.Unlock full list

SCENARIOS-Franchise loss signals change at National Express

Published 07/13/2009, 10:23 AM
Updated 07/13/2009, 10:48 AM
NWG
-
FGP
-
MCG
-

* Transport group could exit UK rail completely

* Takeover or break-up remains a possibility

* Rights issue seen by analysts as a probable outcome

By John Bowker

LONDON, July 13 (Reuters) - Debt-laden transport group National Express was stripped of its biggest British rail franchise this month, casting doubt on its future as a network operator in the UK.

The company complained that the terms of the East Coast franchise were out of date with slower passenger growth brought on by the recession, but the government refused to renegotiate the terms and insisted the London-Edinburgh route be taken back into state ownership.

National Express, which also has bus operations in North America, Spain and the UK, is struggling with a monster debt pile of over 1 billion pounds ($1.61 billion) -- more than double the value of the company -- while its chief executive has quit to take a job in the United Arab Emirates.

It has rejected an informal takeover approach from Scottish rival First Group, which was keen to take advantage of recent share price vulnerability.

Despite that interest, the shares remain down some 40 percent in the year to date.

Here are some possible scenarios for the future of the company.

NATIONAL EXPRESS EXITS UK RAIL

National Express operates three British rail franchises: The East Coast mainline between London and Edinburgh, East Anglia between London and nearby Norwich, and the small commuter franchise C2C.

The company pledged to pay 1.4 billion pounds ($2.25 billion) to the government over more than seven years to run the East Coast in August 2007, but the franchise is expected to lose 20 million pounds in the six months to end June this year.

However, analysts think that the end of the East Coast franchise deal could boost National Express, despite the route being a prestigious one.

"Inability to see a floor to East Coast losses had introduced material uncertainty to the outlook. The group has now detailed its exit plan, stemming that key concern," says Joe Spooner, at Royal Bank of Scotland.

The downside for the group is that while it insists it wants to keep the remaining two franchises, a furious government has warned that it will try to take them away.

"I note that the parent groups of previous franchise failures are no longer in the UK rail business," warned Transport Minister Andrew Adonis.

That would leave National Express a pure bus operator, a defensive stock-market play that would be vulnerable to larger transport groups.

NATIONAL EXPRESS IS TAKEN OVER OR BROKEN UP

National Express rejected the all-share approach from FirstGroup as highly preliminary and on unspecified terms, and analysts said a follow-up bid now that East Coast may be removed is unlikely in the near term.

A combination between the two -- which would create a transatlantic giant as both have operations in North America -- would be complicated by potential legal battles between National Express and the government over its remaining two franchises.

That said, financial weakness at National Express has led it to state that it would consider "further disposals". This could include its North America school bus operations, which analysts say is the likely star attraction for FirstGroup in terms of synergies.

FirstGroup has debt if its own, some 2.7 billion pounds as a result of a previous deal. That could leave Stagecoach, another North America exposed company but with a stronger balance sheet, as a potential front-runner to buy National.

"National Express is certainly in play," says Douglas McNeill at Astaire stock-brokers, adding that the lack of a CEO makes it more vulnerable.

NATIONAL EXPRESS LAUNCHES RIGHTS ISSUE

Fixing the balance sheet without the uncertainty of making disposals would be easiest done through a rights issue, and despite the cost of raising funds, analysts generally agree that this is the most likely near-term outcome.

"Given the size of disposals required to restore the balance sheet, and the group presumably wanting to avoid fire sale prices, we assume it plumps for an equity funding," says RBS' Joe Spooner, estimating that the firm could fetch over 400 million pounds this way.

National Express has not ruled out this approach, which could yet help it become a recovery play. But much will depend on Spain's Cosmen family, who own 17.4 percent of the company's shares.

(Editing by Sitaraman Shankar)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.