Firstgroup walks tightrope as activist investor pushes for split
UK rail operator under mounting pressure over Greyhound and US school bus business
The Greyhound buses that criss- cross the US and the yellow school buses that ferry American children to school are recognisable across the world. Few outside Britain, however, are likely to have heard of South Western Railway and Great Western Railway.
What unites them is their owner: Firstgroup, a FTSE 250 company. The logic of the UK company owning them all has been questioned by some shareholders ever since Firstgroup’s £3.6bn acquisition of Laidlaw in 2007 brought it Greyhound and a bigger presence in the US school bus business.
The argument that investors would benefit from splitting the UK and US businesses has been taken up belligerently in recent months by Coast Capital Management, a US activist investor with an almost 10 per cent stake in Firstgroup. Earlier this month the fund, which is based in New York, said it would seek to remove six of Firstgroup’s 11 board directors and install seven of its own.
Having a vocal activist on FirstGroup’s shareholder register increases the pressure on Matthew Gregory, who has led the transport group since November, to lay out the case for holding the company together when its full-year results are published on Thursday.
Gerald Khoo, an analyst at Liberum, said Coast’s campaign had “upped the pressure” on Mr Gregory to produce a “meaningful response” over its strategy. “While the problems and challenges faced by Firstgroup significantly predate Matthew Gregory’s tenure at the firm, let alone as CEO, shareholder patience is starting to run out.”
Analysts expect Firstgroup to report a 10 per cent rise in revenue to £7.1bn for the year to the end of March 2019, while earnings before
interest, tax, depreciation and amortisation are forecast to increase 2.9 per cent to £711m.
The case for separating the businesses, say its advocates, is that Firstgroup’s share price is depressed by the less profitable UK rail businesses and fails to reflect the strength of First Student, its US school bus business.
First Student, the biggest provider of school transportation in the US with a fleet of 42,000 buses, had an operating margin of 8.8 per cent in the 12 months to the end of March 2018. UK rail, by contrast, had one of 2.9 per cent.
The more recent travails of the UK rail business include delays stemming from infrastructure work at London Waterloo, the UK’S busiest station, and predicting losses of as much as £106m over the remaining life of its Transpennine Express contract.
Nandeep Bamrah of West Face Capital, a Canadian asset management group and Firstgroup shareholder, said First Student had “significant potential” but this was not reflected in Firstgroup’s share price. “The status quo is not sustainable,” he said.
The company’s shares have fallen almost 80 per cent since the Laidlaw acquisition and are at levels last seen in the late 1990s.
Meanwhile, James Rasteh, Coast’s chief investment officer, said Greyhound’s property portfolio is worth far more than Firstgroup’s share price currently reflects. Any cultural resonance Greyhound buses may have has proved no defence against competition from low-cost airlines.
A review of the business last year saw a decision to pull out of western Canada, as well as sell property in Chicago in January for $38m. Another in Denver went up for sale last month. However, the company decided to maintain Greyhound’s national network across the US.