Martin Flanagan's Business Blog: National Express takeover a risky business for Stagecoach

Published on Monday 27 July 2009 12:01

IT MUST be a long night of the soul for Brian Souter to weigh a possible full takeover bid by his Stagecoach group for rival buses-to-rail company National Express.

Souter has hired investment bank Deutsche Bank to put together a plan that might trump the 'indicative proposal' made to National Express by a consortium of Spain's wealthy Cosmen family and private equity group CVC – if he can't get agreement with the consortium to buy 'parts' of the British company as part of that takeover.

It must dredge up very bad memories for Souter because Stagecoach nearly went completely wheels-up early in the millenium after what turned out to be the disastrous near-800m acquisition of Coach USA a couple of years earlier.

The company later admitted not enough due diligence was done before the acquisition of Coach and it found a lot it was not happy with after taking the wheel stateside.

A plummeting share price, a major rights issue, massive losses and writedowns, and management turmoil that saw Souter become chief executive again followed.

So did a radical retrenchment of Stagecoach that saw massive surgery on Coach USA, alongside a phased withdrawal of Stagecoach from Asia, Australasia and Scandinavia.

Stagecoach slimmed to survive, and achieved it impressively. But taking on a debt-laden National Express, the latter in the midst of handing back its east coast rail franchise to the government through over-ambitiousness in its financial targets, would be a remarkable U-turn on this slimmer-and-fitter strategy.

Souter would obviously prefer to cherry-pick some assets, most probably the buses but possibly also some National Express rail businesses, rather than mount a full takeover for the above reasons.

Although he might well argue that taking on a UK transport group he knows would not carry the same risk as Coach did across the Atlantic.

Stagecoach could also dilute the risk factor by possibly going after some of National's rail businesses with his joint venture partner in Virgin Rail, Sir Richard Branson.

That would spread the risk on the east coast franchise, which Branson has said he would be very interested in if, as expected, National Express relinquishes control.

But a move on National by Stagecoach, with or without a partner, is obviously a risk in the worst recession since before the second World War.

The potential target is also carrying well over 1bn of debt. But does Souter believe Stagecoach has done enough 'penance' for Coach and should be given the benefit of the doubt on a major acquisitive move after several years of good organic growth?