Firstgroup just the ticket again as private equity tries to board

Comment Martin Flanagan

Scottish transport giant Firstgroup has been hardpressed to find a smile on the stock market in recent times. But the unexpected preliminary takeover approach from American private equity group Apollo Management has got the City wondering whether it has overdone the caution sparked by recent tough trading for Firstgroup on both sides of the Atlantic.

Some of that is purely fortuitous. Harsh American winters often leave transport operators looking weatherbeaten, and in the UK we had the climatic “Beast from the East”. But it has taken the skull-and-crossbones ensign of private equity, always on the lookout for undervalued assets, to hove into view to make the stock market realise the wheels haven’t come off the UK transport group.

After all, Firstgroup holds leading or near-leading positions in all its main markets, from UK bus and rail to its yellow school buses and iconic long-haul Greyhound bus operations in the United States. That is a strong competitive edge in any sector.

The company has knocked back the approach, whose terms were not revealed, branding it as fundamentally undervaluing it and opportunistic, although the latter allegation can be discounted outright as what calibre of private equity player would consciously make a takeover approach at an inopportune time? As the proverb goes, it’s all fish that comes to the net.

It is no stain on the Apollo escutcheon to want to acquire a business at a good price. Equally, it is Firstgroup’s fiduciary duty to fight for the best price for its shareholders.

Apollo’s entry left-stage cannot but be helpful, though, in changing perceptions of the value of the target, and that is why Firstgroup’s shares bounced 8 per cent yesterday on the bid rejection.

It will also focus the mind of Firstgroup management on crystallising value for long-suffering investors. The shares are off 40 per cent in the year to end-march, while Firstgroup has also not paid a dividend since the rights issue in 2013.

In short, a good business with strong market positions that has gone through a lengthy tough time. For investors, Apollo’s interjection may be the cause for reflection on what the medium-term prospects for Firstgroup are.