Stagecoach chief hopes Coach USA will motor ahead this time around

By MARTIN FLANAGAN
Published on 25/06/2012 00:00

STAGECOACH chief executive Sir Brian Souter will launch a charm offensive tomorrow to convince the City that he has only bought the “good bits” of collapsed bus firm Coach America, which owned a number of assets he sold nearly ten years ago.

The Perth-based company, which is expected to report lower but resilient full-year profits, revealed last month that it was paying more than £100 million to buy nine businesses from the failed American company.

Coach America has been in Chapter 11 bankruptcy protection since the start of this year.

Analysts at Deutsche Bank warned: “Coach America contains a number of ex-Stagecoach businesses that under-performed and were sold almost a decade ago.

“Therefore there will probably be some nervousness in the market that Stagecoach are repurchasing assets that are known to have underwhelmed in the past.”

However, it is understood that the Stagecoach founder will stress it is a far less risky purchase this time round because he has been highly selective in just bidding for the “good” parts of the business.

One source familiar with the situation said: “Souter will say there is no need for nervousness about this strategy as it is positive.

“The assets purchased are only about one-third of the Coach business and they are the good bits.

“The only reason they were sold off when Stagecoach’s North American operation was being restructured was that you sell assets as a package and they will not get away if everything being sold is weak. This time round, Stagecoach was negotiating from a position of strength, given Coach was in Chapter 11.

“Souter will repeat that the businesses acquired are in a different scenario, with profit margins of 14 and 15 per cent.”

In 1999, Stagecoach spent £1.3bn buying Coach USA. Souter suffered badly from that overpriced deal, as did his shareholders, who saw their investments in the one-time FTSE 100 company plummet and the loss-making US business largely written off.

In June 2003, private equity firm Kohlberg paid $155m for the south central and west regions of Coach USA, which eventually became the Coach America business.

In April this year, Stagecoach bought nine coach businesses from insolvent Coach America and will turn them into Megabus operations to challenge the Greyhound service owned by rival Scottish firm FirstGroup.

Souter – who was forced to sell the US business to save the wider company – is confident that the businesses he is taking on are profitable and that lightning won’t strike twice.

City supporters of the acquisition point out that the group’s share price has held up well since the deal was announced, trading at 231p just before the purchase and closing on Friday at 251.9p.

Stagecoach’s growth in recent years has been primarily organic and the company is set to reveal that its UK rail and bus businesses have been resilient despite economic headwinds.

The City consensus is for a pre-tax profit of £196m in the year to 30 April, down from £205.7m seen in the previous year.

In an April trading update, Stagecoach posted a near-9 per cent rise in sales at its rail division for the 48 weeks to the beginning of that month.

John Lawson, an analyst at Investec, said most Stagecoach divisions were trading relatively well and that management was “on top of its game”.