First Group suitor Apollo ‘must have pen­sion plan’

A pri­vate equity firm’s ap­proach for the bus and train op­er­a­tor FirstGroup may cre­ate a po­lit­i­cal head of steam, finds Bradley Ger­rard

The Daily Telegraph - Business - - Front Page - By Bradley Ger­rard

THE pen­sions watch­dog has warned a US pri­vate equity firm that its planned takeover of the rail op­er­a­tor First Group will face scru­tiny over the com­pany’s £350m re­tire­ment fund deficit.

First Group re­vealed it had re­jected an “op­por­tunis­tic” ap­proach at an undis­closed price from Apollo Man­age­ment on Wed­nes­day night. Yes­ter­day the pri­vate equity firm was al­ready at­tract­ing po­lit­i­cal and reg­u­la­tory fire.

The Pen­sions Reg­u­la­tor (TPR) said it would “ex­pect any busi­ness plan­ning a ma­jor cor­po­rate trans­ac­tion, such as a takeover, to iden­tify if there is po­ten­tial ma­te­rial detri­ment to a pen­sion scheme and ex­plain how they will mit­i­gate against that detri­ment”.

First Group’s pen­sion deficit has been a fi­nan­cial mill­stone for the firm but any at­tempt by Apollo to shirk re­spon­si­bil­ity for its 50,000 de­fined ben­e­fit mem­bers would spark po­lit­i­cal fury.

The reg­u­la­tory clear­ance process is vol­un­tary but TPR said it was im­por­tant to se­cure its ap­proval be­cause, with­out it, the body could turn to its anti-avoid­ance pow­ers to force Apollo to close the deficit. TPR can look back six years to iden­tify ac­tions taken by man­age­ment that might have been detri­men­tal to its pen­sion schemes. Shadow trans­port sec­re­tary Andy McDon­ald said: “Labour will be seek­ing ur­gent as­sur­ances from the Gov­ern­ment that this deal pro­tects em­ploy­ees and their pen­sion schemes. If such guar­an­tees can­not be pro­vided, we will be call­ing on the Gov­ern­ment to block the deal.”

John Ralfe, a pen­sion con­sul­tant, said the re­cent bid by Mel­rose for GKN had shown how im­por­tant pen­sions are in ac­qui­si­tions.

Apollo is yet to com­ment on its plans for First Group.

The sur­prise bid for one of Bri­tain’s largest bus and rail com­pa­nies by an Amer­i­can pri­vate equity firm looks set to in­ten­sify the de­bate about own­er­ship of the rail­ways and UK plc more gen­er­ally. New York-based Apollo Man­age­ment has been re­buffed by the Aberdeen-based trans­port group but the pri­vate equity firm now has un­til May 9 to make a for­mal of­fer.

A for­mal bid threat­ens to raise the al­ready high tem­per­a­ture in the rail in­dus­try. Apollo has no prior ex­pe­ri­ence of run­ning a fran­chise and brings with it all the po­lit­i­cal bag­gage of a ma­jor buy­out firm.

FirstGroup, which was founded in 1986 as Grampian Re­gional Trans­port, floated on the Lon­don Stock Ex­change in 1994 with a £57m val­u­a­tion on the back of a raft of bus ac­qui­si­tions.

It is now a £1.2bn FTSE 250 com­pany with con­trol of Bri­tain’s third and fourth largest rail fran­chises by ticket rev­enue. It runs South Western Rail­way from Lon­don Water­loo and the Great Western Rail­way via Padding­ton.

Apollo’s ap­proach means yet an­other op­er­a­tor would end up in the hands of a for­eign owner. Al­ready, just six out of 18 firms el­i­gi­ble to bid for con­trol of UK rail fran­chises are British com­pa­nies.

Gerald Khoo, trans­port an­a­lyst at Liberum, said: “The ac­qui­si­tion of a large UK em­ployer pro­vid­ing es­sen­tial ser­vices to the pub­lic by a for­eign pri­vate equity fund seems un­likely to be wel­comed in the cur­rent po­lit­i­cal en­vi­ron­ment.

“Even be­fore that pri­vate equity own­er­ship of rail fran­chises seems un­likely to be ac­cept­able.”

The Gov­ern­ment has al­ways sought out op­er­a­tors that can demon­strate both op­er­a­tional ex­per­tise in rail and a long-term com­mit­ment to the in­dus­try. Min­is­ters are likely to want a say in any change of con­trol of any rail fran­chise.

Apollo, founded in 1990, was launched from the ashes of the in­vest­ment bank Drexel Burn­ham Lam­bert, which col­lapsed af­ter a junk bonds scan­dal. Leon Black, the for­mer head of Drexel’s merg­ers and ac­qui­si­tions de­part­ment, launched the firm with var­i­ous for­mer Drexel col­leagues, and in­vests money on be­half of some of the world’s largest pen­sion funds.

Some of its re­cent big pur­chases in­clude Har­rah’s En­ter­tain­ment, a lead­ing US gam­ing and casino com­pany; Nor­we­gian Cruise Line, the cruise line op­er­a­tor; and one that is per­haps more fa­mil­iar with British con­sumers, Claire’s, the re­tailer of cos­tume jewellery.

Trans­port has not been an in­vest­ment fo­cus, how­ever.

Luke Pol­lard, Labour MP for Ply­mouth, said its ap­proach for FirstGroup raised “se­ri­ous po­lit­i­cal ques­tions”.

He said: “Pri­vate equity firms are fa­mous for as­set strip­ping and profit max­imi­sa­tion and I don’t know if that’s the type of busi­ness we want run­ning our rail­way.

“The takeovers of British busi­nesses in the past few months is a con­cern be­cause they are be­ing lost and it seems to me we don’t have a gov­ern­ment that is stand­ing up for such com­pa­nies.”

Yet FirstGroup is in some ways easy prey. Amid a malaise of sev­eral years, it has been un­der par­tic­u­lar pres­sure in re­cent months. Its shares fell nearly two-fifths to 82p at the end of March af­ter it cut its earn­ings ex­pec­ta­tions.

The com­pany runs roughly a fifth of the na­tion’s buses but has found con­di­tions across the UK ex­tremely tough. It has been forced to re­lin­quish swathes of busi­ness to ri­val Go-Ahead.

It has also been hit by poor weather in the US, which has hit its Stu­dent Bus divi­sion, and the rise of low-cost air­lines in the US has put pres­sure on its coach busi­ness Grey­hound.

There’s also the is­sue of the trans­port firm’s gap­ing pen­sions black hole. FirstGroup was named as the com­pany most un­der pres­sure due to its pen­sion li­a­bil­i­ties in a 2017 study by JLT Em­ployee Ben­e­fits be­cause of the £4.9bn li­a­bil­ity com­pared to its stock mar­ket value, then £1.3bn.

The com­pany spon­sors 12 funded fi­nal salary schemes across its non-rail op­er­a­tions, cov­er­ing ap­prox­i­mately 50,000 for­mer and cur­rent em­ploy­ees. Apollo’s plans for the deficit will at­tract close scru­tiny.

The pen­sions lifeboat the Pen­sion Pro­tec­tion Fund has al­ready been forced to res­cue the schemes of BHS and British Steel, which could make min­is­ters wary of a US pri­vate equity firm own­ing a com­pany with so many work­ers’ re­tire­ments at stake.

John Ralfe, an in­de­pen­dent pen­sions ex­pert, said FirstGroup clearly had a “very large un­der­ly­ing pen­sion li­a­bil­ity given the size of the com­pany”.

He said that the im­por­tance of pen­sions in a bid process were re­cently high­lighted by Mel­rose’s hos­tile takeover bid for en­gi­neer GKN.

“FirstGroup’s pen­sions are huge in re­la­tion to its mar­ket cap of £1.3bn, with a £350m deficit at March 2017. How Apollo will han­dle pen­sions is a ma­jor is­sue, es­pe­cially if the bid is debt fi­nanced, but so far it has said noth­ing.”

Lit­tle is known of Apollo’s plans to turn FirstGroup around. A break up is pos­si­ble. The buy­out firm could be sim­ply seek­ing to se­cure First Group’s US busi­nesses and then sell off the UK ones, thus avoid­ing the po­lit­i­cal strife that a po­ten­tial pur­chase would bring.

FirstGroup’s Stu­dent Bus group, cor­po­rate-fo­cused tran­sit divi­sion and Grey­hound ac­count for roughly 60pc of rev­enues at the group, which stood at £2.77bn at its most re­cent half-year re­sults. This only in­cluded four weeks of the South Western fran­chise it took over from Stage­coach last year, so a more equal bal­ance be­tween the UK and US might be achieved in the com­ing years.

One of FirstGroup’s big­gest in­vestors, who did not want to be iden­ti­fied, ac­knowl­edged the com­pany was “un­der­val­ued” and said it will hold on to its shares while mon­i­tor­ing Apollo’s next move.

An­a­lysts ex­pect full-year pre-tax prof­its of £200m for the year to end-March, slightly be­low the £207m achieved in the prior year. This could mean FirstGroup needs to sur­prise on the up­side to fight off the transat­lantic ap­proach. That could be ex­tremely chal­leng­ing given the harsh weather con­di­tions across the UK this win­ter.

‘The ac­qui­si­tion of a large UK em­ployer pro­vid­ing es­sen­tial ser­vices to the pub­lic by a for­eign pri­vate equity fund seems un­likely to be wel­comed in the cur­rent po­lit­i­cal cli­mate’

Pas­sen­gers stand on the road­side dur­ing a Grey­hound bus lay­over in Wy­oming. Buy­out firm Apollo’s bid for the trans­port group may see it tar­get the US divi­sion, while hiv­ing off its UK op­er­a­tions

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.