Transport operator FirstGroup (FGP) is fighting off activist shareholder Sandell Asset Management which wants to break-up the train and bus company. The market clearly likes the proposal to realise some value in the £1.5 billion cap as investor interest today sends the stock up 4.4% to 121.05p.

FGP - Comparison Line Chart (Actual Values)

Sandell owns 3.1% of the FTSE 250 constituent. It wants FirstGroup to look at selling assets including its school bus operations and the trans-American bus service Greyhound. The operator has rejected the proposals, saying they are 'not compelling' and contain a number of 'structural flaws and inaccuracies'.

FirstGroup comments: 'The Board believes that the current multi-year programme that was set out in May, with clear objectives to improve growth and restore a profile of consistent returns and cash generation, will deliver superior value for shareholders compared to alternatives that were considered in detail earlier this year, and which remain under review. Consequently, we remain focused on the vigorous execution of our strategy.'

Sandell's proposals focus on three areas:


1. Spin-off FirstGroup US: It believes the 'yield-hungry' North American shareholder base is willing to pay a premium for the group's US cash flows. Prior to a spin-off, Sandell believes debt can be raised and the proceeds given to FirstGroup UK. The plc shareholders would get shares in the newly-listed FirstGroup entity under Sandell's proposals.


2. Sell Greyhound. Sandell believes there would be willing buyers given its iconic brand, strong cash flow generation and exposure to strengthening US consumer confidence and spending.


3. Strengthen FirstGroup's UK balance sheet. Sandell says it would use the proceeds from steps one and two to repay debt, putting the business in a better position to bid for UK rail franchises and have cash to invest in the UK bus operation.


At the interims in November, FirstGroup's numbers implied difficulties in its UK bus operations where margins are falling and ongoing struggles at Greyhound. The latter has declining profits with FirstGroup blaming weak US economic conditions.

Liberum Capital initiated coverage on FirstGroup two days ago with a 'buy' rating. It says there are self-help opportunities such as improving operating margins in the UK bus and US student transport operations, albeit expecting progress over three or more years rather than a rapid recovery.

A £615 million rights issue in May strengthened the balance sheet but Liberum says net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) remains above two times. It believes rail franchise wins or renewals are required to avoid increases in leverage.

The investment bank values the North America Student business at £1,466 million and Greyhound at £574 million.


Issue Date: 11 Dec 2013