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FirstGroup rejects private equity approach

The transport group called the approach from US private equity group Apollo Management "opportunistic"
April 18, 2018

After a disappointing year, shares in FirstGroup (FGP) reversed their downward trajectory when management announced it had received a takeover approach from US private equity group Apollo Management. However, it rejected the "highly conditional" cash offer, arguing the “opportunistic” proposal fundamentally undervalued the group. News of the bid sent the shares up 9 per cent on the day. 

IC TIP: Buy at 112p

A firm offer has yet to be made, but Apollo now has until 9 May to make a formal bid under takeover rules. Even if it does – and it can get management and shareholders on board –some major hurdles stand in the way. One of the most significant barriers could be the required government approval to change the operator of the three public rail franchises operated by FirstGroup. Analysts at Liberum reckon that private equity ownership of rail franchises would unlikely be deemed acceptable. Awarding these contracts to operators is already a contentious task, and the government tends to favour those that can demonstrate expertise in the transport industry and a long-term commitment. It is questionable whether the addition of Apollo to the mix would satisfy this criteria.

FirstGroup’s pension deficit may also prove difficult to navigate around. FirstGroup was identified last year by a report from employee benefits adviser JLT as the company most under pressure from its pension schemes relative to its size. It had £4.8bn of pension liabilities at the end of March and a £359m deficit, against a £1.3bn market capitalisation.

However, even if a formal offer from Apollo did not materialise, analysts think the approach could spur action from the board to make changes at the group to better realise its underlying value. Liberum analyst Gerald Khoo reckons FirstGroup has “near-leading” positions in all its main markets, but recent poor performance and exposure to domestic politics means its shares have been undervalued by the market. That's despite the fact around two-thirds of its revenue now comes from outside the UK.