ScotRail owner urged to pull back from US

Transport giant FirstGroup is under pressure from an activist shareholder to split off its US assets and invest more in its UK bus and rail operations.

FirstGroup has been urge to pull back from its US opertions. Picture: Ian Georgeson

New York-based Sandell Asset Management, which owns 3.1 per cent of the Aberdeen firm, said floating off its yellow school bus division and selling the iconic Greyhound business would drive “strategic performance and unlock shareholder value”.

But FirstGroup, whose shares jumped almost 5 per cent, today stressed it had reviewed the hedge fund’s proposal and found it “is not compelling and contains a number of structural flaws and inaccuracies”.

The group, which last week lined up Aviva boss John McFarlane to replace chairman Martin Gilbert, added: “The board believes the current multi-year programme, set out in May, with clear objectives to improve growth and restore a profile of consistent returns and cash generation, will deliver superior value for shareholders.”

First, led by chief executive Tim O’Toole, is planning to invest about £1.6 billion in its bus and rail businesses over the next four years, after its growth plans were derailed last year by the botched bidding process for the West Coast main line franchise.

Last month it reported a first-half loss of £8 million, down from £20.6m a year earlier, but bus revenues in the UK tumbled 14 per cent to £490.7m because of the sale of its operations in London and the previous year’s Olympics-related boost.

Tom Sandell, founder and chief executive of the US hedge fund, has written to McFarlane and outgoing chairman Martin Gilbert to argue that spinning off the yellow school bus business, which transports about six million students each day, would appeal to “yield-hungry” North American investors, while selling Greyhound would enable it to reduce its £1.4bn debt pile, much of which was incurred by the £1.9bn acquisition of US firm Laidlaw in 2007.

Sandell said: “Our established track record in company analysis and our sector expertise tells us that FirstGroup can turn around its historic poor performance by focusing on its UK rail and bus businesses.

“We will continue to engage with the company and invite other shareholders to discuss our proposals so that together, as responsible owners of this business, we can set it on the right path to long-term success.”

First said its board was “open to all means of enhancing long-term value”, and more information about its turnaround strategy will be presented to investors next month, after Scots-born McFarlane takes the helm. It added: “The group has engaged with Sandell several times, reviewed their proposal in detail and believes it is not compelling and contains a number of structural flaws and inaccuracies.”

Shares in FirstGroup, which axed its final dividend in May and was forced into a deeply discounted £615m cash call to defend its credit rating, rallied 5.6p – or 4.8 per cent – to 121.6p after Sandell said it would lobby other shareholders to support its proposals.

However, Gerald Khoo at Liberum Capital said: “Selling underperforming assets when they are cyclically depressed is unlikely to realise more value than restructuring them, and seeking an exit at a better point in the cycle, if appropriate.”