FirstGroup shares hit the buffers with City lukewarm over West Coast rail franchise bid victory

The Aberdeen-based transport giant won the 13-year franchise with a bid of £5.5 billion, well above the £4.8bn offered by current operator Virgin Rail, in which Perth-based Stagecoach has a 49 per cent stake.

FirstGroup said revenues on the London to Glasgow route are expected to grow by 10.4 per cent a year during the franchise, which begins on 9 December, but Espirito Santo analyst Gerald Khoo said that forecast appeared “highly optimistic”.

He noted that revenues on the route had risen by a compound annual growth rate of 10.2 per cent over the past ten years, a period that included a “substantial infrastructure and capacity upgrade”.

Shares in First ended the day down 15.8p, or 6.1 per cent, at 243.2p. Stagecoach rose 5.4p, or 1.9 per cent, to 291.9p.

FirstGroup chief executive Tim O’Toole insisted the group’s bid represented a “deliverable proposition” that will lead to station upgrades and better catering, along with an average 15 per cent cut in “standard anytime” fares.

He said: “We have a proven track record of generating growth from investment in customer service enhancements and innovation, together with a strong focus on operational delivery and financial discipline.”

The group is to introduce 11 new electric trains to increase capacity north of Birmingham, and has pledged to improve journey times between London and Glasgow.

Investec analyst John Lawson said the debate over whether FirstGroup had over-bid for the franchise is likely to rage for some time, but believed the win was a “rare bit of good news” for the group, which had net debt of £1.8bn at the end of March.

Some analysts have speculated that the company would look to cut its debt by raising funds through a rights issue, but Lawson said yesterday’s news made such a move less likely.

He added: “Whilst some may debate the magnitude of the bid, and whether it will come to haunt management in years to come, the win should bolster group earnings.”

Sir Brian Souter, chief executive of Stagecoach, said he was “bitterly disappointed” at the outcome and will look for opportunities elsewhere. The group has been shortlisted to bid for the Greater Western and Thameslink rail franchises.

Souter added: “After 15 years, it is difficult to imagine a West Coast rail service without the Virgin brand.”

However, Virgin founder Sir Richard Branson said it was “extremely unlikely” that the firm would bid again for a franchise, having been out-bid on four previous tenders.

He said: “On the past three occasions, the winning operator has come nowhere close to delivering their promised plans and revenue, and has let the public and country down dramatically.

“In the case of the East Coast mainline, both winners – GNER and National Express – over-promised in order to win the franchise and spectacularly ran into financial difficulties in trying to deliver their plans.

“The East Coast is still in government ownership and its service is outdated and under-invested, costing passengers and the country dearly as a result.”