First bid for National Express is on track despite debt fears

Published on Monday 29 June 2009 21:44

FirstGroup has confirmed it will carry on with its bid to buy rival transport giant National Express Picture: Lesley Donald Photography

FIRSTGROUP last night promised to press ahead with its audacious bid for rival National Express despite warnings that the deal could increase the Aberdeen company's debt and force it to ask shareholders for cash.

National Express yesterday rebuffed First's surprise move, describing it in a statement to the Stock Exchange as a "highly preliminary approach" and saying that it did not consider negotiations on a deal "appropriate".

But in its statement to the markets, First said it "continues to believe that there is significant industrial and commercial logic in a combination of the two companies".

Both groups were forced to issue statements after a letter seeking talks from First's chairman Martin Gilbert to his counterpart at National Express, John Devaney, was leaked.

A merger of two of the country's "big five" would create the largest transport group in the UK. The combined company would own seven of the UK's 19 rail franchises and have a combined turnover of more than 2 billion.

Analysts yesterday warned that the deal could impose an increased debt burden on First.

Royal Bank of Scotland analysts said that First's net debt, at 2.5bn, was already high in addition to National Express debt of 1.2bn.

Collins Stewart said First would have to raise 500 million from shareholders to pay it down. It indicated a "fair value" all-share bid would value National Express at 500p a share.

Sources close to the Aberdeen-based group dismissed this, arguing National Express shareholders would be "lucky" to get 400p a share. The sources added that a 400m fundraising for First would be a "worst case scenario".

Another hurdle for First is the Department for Transport (DfT) refusal to renegotiate terms of the troubled East Coast franchise, currently held by National Express, even for a new owner.

Yesterday a DfT spokesman ruled out chances a new owner could reduce annual payments on the 1.4bn franchise payments in line with falling passenger numbers and revenues.

Failure of talks between National Express and DfT last week to renegotiate the franchise deal are believed to have sparked First's "opportunistic" bid.

Jonathan Jackson of stockbrokers Killick and Co said: "National Express have got lots of debt, they have this East Coast rail franchise that is hurting them at the moment.

"Trading in Spain is tough, and they need a rights issue. It is opportunistic from FirstGroup because they are buying a company that is undergoing weakness at potentially a decent price."

First is already the UK's largest bus operator, running more than one in five of all local buses, and a quarter of the UK's passenger rail network. It has four rail franchises – First Capital Connect, First Great Western, First ScotRail and First TransPennine Express.

National Express, which operates buses in the West Midlands and Dundee, has three rail deals – the East Coast and East Anglia franchises as well as the c2c London commuter service.