December 12, 2013 1:14 am
FirstGroup deflects spin-off call
By Jane Wild
rejection of break-up proposals from an activist shareholder has received
widespread support from analysts.
Sandell Asset Management, a US hedge fund set up by billionaire
called on Monday for FirstGroup to
spin off its
US student and contract businesses and sell Greyhound, the US intercity
It wants proceeds to go towards repaying the debt of the UK-listed transport
group and to be reinvested in its UK bus and rail businesses, allowing it to
boost returns to shareholders.
But analysts have questioned the proposals from Sandell, which has been
building a position in
since the summer and currently holds a 3.1 per cent stake.
“It’s difficult to understand why paying down more debt in a standalone
Firstgroup UK business is the right thing to do. And actually finding
natural buyers for the US businesses may prove more challenging than Sandell
anticipate,” says Anand Date, a transport analyst at Deutsche Bank.
Damian Brewer, at RBC Europe, says that there was the risk that any cash
value created would leak back to resolving First’s substantial pension
deficits, rather than going to shareholders.
Analysts have valued Greyhound at eight to 10 times operating profit of £60m
in year to March 2014, putting it at £480m-£600m.
appears timed to coincide with the appointment of a new chairman, John
McFarlane, who faces a baptism of fire. His appointment and Sandell’s move
have led some analysts to privately question Tim O’Toole’s position as chief
FirstGroup holds a capital markets day in January, when a more detailed
picture of their response will be delivered.
Although FirstGroup appears to have the support of most analysts in
rejecting Sandell’s proposals, management face the tricky task of keeping
investors on board, given that the turnround plan is expected to take
It must first improve the operational performance of its two biggest profit
drivers, the UK bus and US school bus operations, with the aim of generating
free cash that can then be used to pay down debt.
One of the main challenges management faces in the UK is that it needs to
invest to renew its bus fleet in the hope of attracting more passengers, at
a time when its fares are already high.
Some of the funds raised from its
£615m rights issue this
May – which sent the share price plummeting – will be used to
finance a £1.6bn investment plan, largely aimed at renewing the bus fleet.
“The management of FirstGroup are trying to execute on a turnround plan at
the moment. But this is more of a slow-burn process than a quick fix and
could take up to three years,” says Mark Manduca, analyst at Bank of America
Mr Sandell, chief executive of Sandell Asset Management, dismissed
He says: “They don’t understand it yet and are making up excuses as to why
the plan wouldn’t work.”
Fellow investors supported the move, he says, adding that he had taken
multiple calls from both private equity and strategic buyers expressing an
Other top 10 FirstGroup shareholders, including Majedie Asset Management and
Legal & General, declined to comment.
Josh Black, an analyst at the data provider Activist Insight, said the small
size of Sandell’s stake would not prevent them from pursuing their
objectives. “What’s important is whether they can convince other
He adds: “If Sandell want to take this campaign forward they will have to up
the ante a bit, it’s harder in the UK to unseat a board.”