Franchise fiasco wipes more than £200m off FirstGroup’s value

ALMOST £250 million was wiped off FirstGroup’s market value yesterday as analysts warned that the west coast rail line franchise fiasco could weaken the Aberdeen-based transport group’s balance sheet and may trigger further asset sales or even a rights issue.

Transport Secretary Patrick McLoughlin’s decision to put the brakes on the tendering process for the Glasgow-to-London route could force FirstGroup to sell more of its UK bus operations or student bus services in the United States if it loses the franchise.

The City expects that losing the route would slice £10m off FirstGroup’s operating profits in its current financial year and a further £50m in its next year. The firm would also lose out on up to £60m of “helpful” working capital, weakening its balance sheet, which already carries £1.8 billion of net debt.

Shares in FirstGroup plunged by as much as 22 per cent yesterday, wiping some £259m off its market cap. The stock later rallied slightly to closed down 20.7 per cent or 50.6p at 193.4p, a loss of nearly £244m from its value.

The Department for Transport awarded the franchise to FirstGroup in August, sparking a legal challenge from Sir Richard Branson, who runs the incumbent Virgin Rail service through a joint venture with Sir Brian Souter’s Perth-based Stagecoach Group. Shares in Stagecoach edged ahead by 1.9 per cent yesterday, closing up 5.5p at 288.8p.

Analysts said the review of the west coast bidding process puts pressure on FirstGroup chief executive Tim O’Toole to win further rail franchises and turn around both its UK bus division and its United States student transport unit. “A lack of success in any of these could increase the pressure on the balance sheet and the risk of a rights issue,” said JP Morgan analyst David Pitura.

News of the west coast blow came just a day after FirstGroup issued a brief trading statement ahead of its interim results. No update was given on the firm’s attempts to sell off parts of its UK bus division but Invest Securities analyst John Lawson noted the group’s US student bus division “is now well set on the path to recovery” after the sale of some unprofitable routes.

Damian Brewer, an analyst at RBC Capital Markets, said FirstGroup faces a £300m bond refinancing next year, adding to the need to raise more cash, possibly through asset sales.

Commenting on the west coast franchise review, Shore Capital analyst Karl Burns said: “This is disappointing news for FirstGroup and could lead to fears over the loss of the franchise and subsequent balance sheet concerns.

“We retain our ‘hold’ recommendation on FirstGroup given the uncertainty over the group’s future profit profile, not only on the west coast franchise, but in addition [at its] school bus [operations] and the impact on the balance sheet ratios.”

Jefferies analyst Joe Spooner added: “The direct impact clearly falls on FirstGroup where the shares had priced in the franchise win.”

Spooner warned that McLoughlin’s review of the tendering processes for all franchises could have a “small negative” knock-on effect for other stocks in the transport sector, such as Go-Ahead and National Express, which have been shortlisted to take on other routes.