Buyout Firm Tears Up a $1.7 Billion Greyhound Bus Ticket
(Bloomberg) -- Cancel the popcorn and vacate the ring-side seats. U.S. private equity group Apollo confirmed on Tuesday that it won’t make an offer for British train and bus operator FirstGroup Plc, which also owns America’s Greyhound network.
Apollo didn’t say why it’s backing away, and all we know from FirstGroup is that the price Apollo had in mind was too low to warrant further discussion. Still, it’s not difficult to imagine that Britain’s politics were a factor here — if only a small one. The U.S. buyout firm’s interest had drawn screams of “asset-stripper” from the left-wing opposition Labour Party and trade unions.
In fairness, private equity hasn’t always acted in a way that would discourage such a description. Loading up on debt, flogging off the family silver and slashing jobs often follow the arrival of the leveraged buyout crowd.
Britain’s private rail companies have also made a habit of delivering a shoddy service for an exorbitant price. So, understandably, the public wants investment, not profit extraction. Labour leader Jeremy Corbyn would go a step further by re-nationalizing the railways.
Still, when done right, private equity owners strive too to improve the performance of the businesses they own — and boy could FirstGroup do with some of that. As I explained here, Firstgroup’s stock has gone nowhere since a 2013 rights issue, when it stopped paying a dividend. It faces many challenges, from the intense competition for U.K. rail franchises to its U.S. customers choosing to fly instead of taking a Greyhound bus.
Operating margins are pretty meager and management is hamstrung by 1.25 billion pounds ($1.7 billion) in net debt plus 340 million pounds of pension liabilities. It’s a complicated situation, but FirstGroup’s leadership hasn’t been in enough of a hurry to unpick it.
Ideas that might create value at FirstGroup range from spinning off the north American bus assets — which contribute about 60 percent of sales, according to Bloomberg data — to selling valuable inner-city Greyhound bus depots so they can be redeveloped as housing.
At least the experience of Apollo breathing down its neck might encourage FirstGroup to treat these ideas more seriously. Although the shares tumbled 8 percent on Tuesday's news, the stock remains about 30 percent higher than its March nadir — valuing the company’s equity at 1.2 billion pounds ($1.7 billion). Investors seem to think some kind of corporate action will be forthcoming.
While that’s good for FirstGroup, the worry for shareholders in other underperforming British companies is whether political uncertainty discourages bidders from stepping forward. Corbyn is the biggest potential danger for U.S. firms that spy opportunity across the Atlantic, but Theresa May’s ruling Conservatives have made unhappy noises about other bid situations such as the takeover of GKN Plc.
Yet without the threat of a takeover, poorly managed companies would be free to extract rents without adding much value either for their owners or the wider economy. Asset-stripping is an unhealthy thing, for sure, but so is asset-slackness.
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