Pressure on FirstGroup as activists demand US split

John McFarlane must convince the market that the groups recovery is on track. Picture: Newcast

The chairman of Aviva, who replaced Martin Gilbert at the helm of the Aberdeen-based firm at the start of this month, is facing an early test in his leadership to convince the market that the group’s recovery plans are on track, with analysts at Investec describing 2014 as a “make or break year”.

FirstGroup last week said that trading in the final three months of last year had been in line with expectations, with sales accelerating at its UK bus business and UK rail minister Stephen Hammond announcing it had made the shortlist of bidders for the East Coast mainline franchise.

However, trading at its US yellow school bus operation was hit by the heavy snow that hit much of North America, while the subdued economy put pressure on the “value-focused consumers” that make up much of its customer base.

The company is due to hold an investor event on Thursday, when a proposal from New York-based hedge fund Sandell Asset Management to split off its US assets will be scrutinised. Sandell, which owns 3.1 per cent of FirstGroup, wrote to McFarlane last week to pressure the board to consider its plans, which include floating off the yellow school bus division and selling Greyhound.

The hedge fund’s chief executive, Tom Sandell, says spinning off the school buses would appeal to “yield-hungry” North American investors, while selling Greyhound would enable the Scottish firm to reduce its £1.4 billion debt pile, much of which was incurred by the £1.9bn acquisition of US group Laidlaw in 2007.

However, Shore Capital analyst Martin Brown doubts a buyer is waiting for Greyhound, which carries about 18 million passengers a year.

“I would have suggested that, if cash was getting tight and there was an appetite for somebody to buy it, they would have sold it,” Brown told Scotland on Sunday.

FirstGroup said at the time of the Laidlaw deal that it would consider selling Greyhound, and its Perth-based rival Stagecoach is understood to have taken a look at the business in the past.

While Stagecoach chief executive Martin Griffiths last month acknowledged that he would “never say never” to any deal, the group was focused on its existing US operations.

A source close to Sandell said the activist has been garnering more shareholder support since it wrote to FirstGroup’s board again last week, but Brown said: “I haven’t spoken to anybody thus far that has told me they are broadly supportive of the deal.”

He said a “fundamental problem” with the break-up plan is that UK investors, such as pension funds, would miss out on any turnaround at the school bus division if it was floated off. “If you’re a UK investor and the US business is split off, you can’t hold the shares – you’d have to sell immediately or even before it happens.”

FirstGroup chief executive Tim O’Toole insisted last week that the firm was on the right track to “improving returns and growth prospects for the benefit of all our stakeholders”.

Investec analyst John Lawson said: “The next 12 months or so are going to be critical for management to convince the market that it has the right strategy.”