Comment: Changing of guard bodes ill for FirstGroup

Terry Murden. Picture: TSPL

Terry Murden. Picture: TSPL

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THE expected retirement this week of Martin Gilbert as chairman of transport operator FirstGroup follows similar announcements over the last month from Lord Smith at Weir, Sir Win Bischoff at Lloyds Banking Group and Richard Findlay at STV. The guard is clearly changing.

Gilbert is the longest-serving of the four, taking up the post at the company’s formation in 1995 and seeing it rise to become Britain’s biggest bus operator and one of the biggest rail franchise holders.

But the timing of his departure comes amid a period of uncertainty for the company, which has been hit by a combination of factors. These include the reduction in subsidies to bus companies, rising costs, and the fiasco over the awarding of the west coast rail franchise, which it won and then had taken away when it was discovered there had been errors in the bidding process.

The company was forced to issue a profits warning last year and has also built up a £2 billion debt mountain, largely through acquiring the US school bus operator Laidlaw.

The prospect of fund-raising to help pay it off and ease pressure on the balance sheet has been talked about for some time. So expectations of a rights issue of between £500 million and £600m to be announced this week will not be a big surprise, nor will the expected cut in the dividend, though it could be more severe than shareholders were hoping.

It was a measure of how difficult things have become for FirstGroup chief executive Tim O’Toole that one analyst greeted last month’s trading update positively simply because there was no further sense of trouble. Trading was in line with expectations, the first time in three years that there had been no warning or lower guidance. It also managed to offload more bus divisions, achieving its stated £100m in targeted sales.

However, broker Shore Capital is expecting profits to halve over the next year and the dividend to be slashed by more than two-thirds.

Against this backdrop the shares have performed reasonably well and there is no sense of panic, but that could begin to change if, as rumoured, it breaches its banking covenants and there is a downgrading of its credit rating. The company has played down such fears, but sentiment around it is far from upbeat.

Morrisons can deliver the goods

The long-running feud involving online grocery distributor Ocado and the two supermarket chains Morrisons and Waitrose could be destined for the courts, unless the latter cuts its losses and sets up a rival service, or even joins forces with Marks & Spencer.

Shoppers ordering their bread and baked beans online will be largely unconcerned by the battle, but shareholders in Ocado, now chaired by former M&S boss Sir Stuart Rose, were impressed by its deal with Morrisons which saw the value of their holdings soar by one-third when it was announced on Friday.

The row revolves around a possible breach of the original agreement for Ocado to deliver to Waitrose’s shoppers. This is important for supermarkets as the internet provides the fastest route to growth.

Ocado supporters instead regard it as a Amazon-style distributor, free to operate with multiple customers. This should be the key to its success and the rise in the share price suggests investors share that view.

As for Morrisons, this is an opportunity to play catch-up with its bigger rivals who have made big in-roads into online shopping, and it will help restore some of the shine to chief executive Dalton Philips’ fading star.

Let bull run boost RBS

THE privatisation of the banks took a significant leap forward last week after Lloyds shares moved above the government’s break even price of 61.2p and helped drag Royal Bank of Scotland with them.

Expectations that Lloyds will be in profit this year encouraged buyers, who pushed shares up 3 per cent to close at 62.7p. RBS ended the week 18p higher at 336.75p, not far short of the break even price of 407p.

The Treasury has said it wants to see the price of the banks’ shares remain above break even for a sustained period before selling.

Maybe it should hold its nerve and hope the bull run in the wider market helps carry both into positive territory.

Twitter: @TerryMurden1

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