FirstGroup bows to investor pressure with Greyhound sale and UK buses spin-off
The South Western Railway owner said it will continue to manage its rail franchises but warned over ‘risk and rewards’ concerns in the sector.
Transport giant FirstGroup has said it will sell off its US Greyhound coach business and spin off its UK bus arm amid pressure from an activist investor to break up the firm.
The Aberdeen-based group, which also operates the South Western Railway (SWR) and Great Western Railway lines, confirmed it is considering a sale of the UK bus business as part of a review of “structural alternatives” for the division.
It also cast doubt over its future in the UK rail business as it warned that it has concerns over “risk and rewards” in the sector.
While it will continue to manage its rail franchises, FirstGroup said it is waiting for the outcome of the Government’s review into the industry and said “any future commitments to UK rail will need to have an appropriate balance of potential risks and rewards for our shareholders”.
The group’s break-up plans come as part of a move to focus on its North American businesses – the First Student school bus division and First Transit, which account for nearly two-thirds of annual earnings.
It follows increasing pressure from an activist shareholders, who had pressed for a break-up of the group.
Coast Capital, which holds a 9.8% stake in FirstGroup, had argued that the transport firm’s share price was being held back by less profitable businesses, which was offsetting the stronger First Student unit.
It had requested an extraordinary general meeting and called for six of FirstGroup’s 11 directors to be replaced.
Shares in FirstGroup lifted 5%, having surged 13% at one stage, as it said the formal sale process for Greyhound is now under way in a move to deliver “best value for shareholders”.
The firm – one of the largest bus operators in the UK with a fifth of the market outside London – also said it believes “now is the right time” to separate out its bus division, which it added has “limited synergies” with its other operations.
Recently-appointed boss Matthew Gregory said a sale of UK bus in “whole or in part” is being considered, alongside a possible de-merger of the division, though he added that the group is aware of competition issues with selling to rivals.
He aims to update on the bus review in six months’ time.
Mr Gregory, who took up the post of chief executive in November last year, said: “We see significant potential to generate long-term, sustainable value and growth from the solid platforms these businesses provide in the North American mobility services sector.
“We are intent on executing this strategy at pace, having full regard to the regulatory and stakeholder procedures and approvals that will be required.”
Details of the overhaul came as FirstGroup posted narrowed pre-tax losses of £97.9 million for the year to March 31 against £326.9 million the previous year.
It said underlying pre-tax profits rose 13.1% on a constant currency basis to £226.3 million.
It revealed a £102.1 million provision on its strike-hit SWR business amid “high levels of uncertainty around the franchise”.
It is in talks with the Department for Transport to resolve issues around the franchise, which has seen passengers suffer delays and repeated industrial action in recent months.
Despite this, the First Rail division saw earnings rise to £72.3 million from £57.8 million the previous year, while its regional bus business posted earnings of £65.8 million, up from £50.2 million.
But FirstGroup warned that the UK rail business will see underlying profits return to more “more normal levels” in the financial year ahead.
The company’s results also showed that the First Student business hiked annual earnings to £173.5 million, up from £156.5 million.
But the Greyhound intercity bus business suffered a plunge in operating profits to £11.4 million from £25.5 million the previous year as it was hit by competition from low-cost airlines and more Americans using their cars thanks to lower fuel costs.
Russ Mould, investment director at AJ Bell, said: “It remains to be seen if this will be enough to deflect calls from Coast Capital for a change in management.
“Chief executive Matthew Gregory could at least argue the case for more time, given he has only been in the driver’s seat since November 2018.”