Private equity firm turns cool on FirstGroup

Transport giant FirstGroup saw its shares head into reverse after its US private equity suitor, Apollo Management, walked away from making a bid.

The firm recently said First Bus had made encouraging margin progress. Picture: Contributed

Apollo’s approach – for an undisclosed amount – was rejected last month by Aberdeen-headquartered FirstGroup, which said it “fundamentally undervalues the company and is opportunistic in nature”. The private equity firm had until 5pm on Wednesday to make a firm offer or walk away.

Apollo’s interest in First, which runs rail franchises including South Western Railway and owns Greyhound buses in the US, was opposed by the Rail, Maritime and Transport union (RMT) as well as the Labour Party.

It comes as takeovers face intense scrutiny following Melrose’s controversial buyout of engineering outfit GKN.

But First has also come under pressure over its performance and structure, with activist investor West Face Capital pressing for operational changes. West Face owns a stake in the bus and rail operator and has raised concerns that its stock is currently undervalued.

In February, First reported a 10.7 per cent rise in year-to-date revenue, but, when stripped of currency effects and excluding the South Western Railway franchise, that increase was just 1.1 per cent.

It said all three of its North American divisions struggled with “extremely challenging” weather conditions in January, while its Greyhound arm was hit by intensifying competition with low-cost airlines.

In a statement today, First told investors: “In recent weeks the board of FirstGroup received two preliminary and highly conditional indicative proposals from Apollo relating to a possible cash offer for the entire issued and to be issued ordinary share capital of FirstGroup.

“Having considered them in detail, the board of FirstGroup concluded that the proposals fundamentally undervalued the company. Accordingly, the board of FirstGroup unanimously rejected the proposals.

“The board of FirstGroup continues to believe in the strong prospects for shareholder value creation available to the company. FirstGroup will publish its full-year results for the year to 31 March on 31 May and will update the market on the company’s outlook at that time.”

While investors showed their disappointment as hopes of a takeover battle were dashed, transport analyst Gerald Khoo, at Liberum, said the approach “highlighted the potential value that lies within FirstGroup”.

He added: “We expect management to come under greater pressure to find alternative ways to crystallise value besides its current organic turnaround strategy.”

Joe Spooner, an analyst at Jefferies, said: “Investors may hope that this experience may inject new impetus into recovery efforts at FirstGroup.

“But our sense is that there’s no quick fix and developments within UK Rail remain our immediate concern.”

In its February update, the transport group noted that its First Bus operation had made “encouraging margin progress” as it benefited from cost efficiency actions and revenue growth. Its First Rail franchise portfolio continued to generate value despite “infrastructure challenges”.