FirstGroup (FGP) may have committed to selling embattled Greyhound Buses and reviewing the future of its UK rail and bus operations, but that was not enough to satisfy activist investor Coast Capital. The US-based hedge fund – which has a 9.9 per cent stake in the transport giant – said it was “appalled” that a potential exit from First Bus was being considered and renewed calls for the removal of six of FirstGroup board members, to be replaced with seven of its own selection.
The board at FirstGroup hit back at its largest shareholder, calling it “an opportunistic, self-interested player that is only focused on short-term gains”. However, Coast Capital has been granted its wish for an extraordinary meeting to vote on the matter, set to take place on 25 June.
It also emerged that Coast Capital made an offer for Greyhound last autumn, which FirstGroup said was at a price lower than the value the hedge fund had placed on the business. Coast Capital refutes the latter point. The activist investor said it was not considering making another offer for Greyhound, but if as it “expects the current board of FGP proceed to sell it in such a way that undervalues it” it “reserves the right to prevent such a fire sale in any way it can to prevent further value destruction”.
Coast is agitating for the complete separation of the US and UK businesses and an exit from UK rail, arguing that plans to refrain from bidding for further franchise agreements do not go far enough.
Admittedly, whether FirstGroup’s plans include the West Coast Partnership – which it entered a bid for in November – remains unclear. The bidding was “still a live competition”, a spokesperson for FirstGroup said, and it was awaiting the outcome, expected to be announced by the Department of Transport this summer.
FirstGroup – which operates three franchise agreements – said Coast’s proposals paid “no regard to the contractual nature of these arrangements”.
Liberum’s Gerald Khoo agreed that an immediate exit from UK rail contracts would not be feasible. “The only way you would get out is by selling the business,” he said. “Given the fact that two out of three franchises are struggling financially… it’s rather difficult to sell the rail business.”
FirstRail has been a serial underperformer, as the division has been forced to take multiple provisions for contracts where passenger growth has been lower than expected – as was the case for the Transpennine Express in 2018 – or when timetabling, infrastructure issues and strike action have impacted its service. The Aberdeen-based group was last year forced to take a £102m provision to account for future losses related to the South West Rail franchise, due to the latter.
Coast has also argued that around £3bn in equipment and £390m in real estate could be sold and leased back, in order to boost the group’s return on capital employed. First has countered that such a plan would only increase the financial leverage of the group at a time when IFRS accounting rules have only recently changed to require this to be reflected as indebtedness.
The activist investor – which said FirstGroup was underleveraged – has also argued for a return to dividend payments. Admittedly, improving free cash generation has meant net debt has been reduced substantially over the past three years, standing at £903m at the end of last year, or 1.3 times adjusted cash profits, from £1.4bn or 2.3 times adjusted cash profits in 2016.
