First Group
Transport operator
has agreed a £3.3 billion ($4.6 billion) deal to sell two U.S. bus units, including its iconic yellow school bus operations.
The London-listed bus and train operator put its U.S. units up for sale a year ago following sustained pressure from activist investor Coast Capital, which had initially called for a demerger.
The company finally announced a deal on Friday to sell North American school bus provider First Student and U.S. bus subsidiary First Transit to Swedish private-equity firm EQT Infrastructure.
stock surged 19% in early trading before slipping back to trade 10.5% higher. The proceeds will be used to pay down debt, address legacy liabilities relating to its Greyhound business, and make contributions to U.K. pension schemes. It will also return £365 million to shareholders this year.
The two units generated combined revenue of $3.96 billion and Ebitda (earnings before interest, taxes, depreciation, and amortization) of $576 million in the full-year to the end of March 2020—the most recent full-year period. First Student has around 42,000 school buses, operating in 435 locations across the U.S. and Canada, while First Transit operates 12,500 vehicles.
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The transport giant has also been looking to sell its U.S. intercity coach business Greyhound since May 2019. The company sold three Greyhound bus facilities for a combined $137 million in December 2020. FirstGroup could move forward on the sale of Greyhound once the First Student and First Transit is completed, Sky News reported.
That would leave the company to focus solely on the U.K. bus and rail market at a time when the Covid-19 pandemic threat is easing and commuters are heading back to offices.
The Covid-19 pandemic has hit FirstGroup hard as passenger numbers have collapsed amid stay-at-home orders and school closures. In the first half of this year, ending Sep. 30, FirstGroup reported a pretax loss of £100 million as total group revenue fell 24% to £3.1 billion and operating profit plummeted 78% to £10.4 million.
Looking ahead. “It’s another win for the activist investor community,” said
investment director Russ Mould. He added that although Coast Capital had suggested a demerger, the sale would be well received due to the good price achieved.
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“FirstGroup will definitely be in a better financial shape thanks to the U.S. disposals,” he added.
Liberum analysts said the sale was a clear positive, allowing the transport operator to benefit from reduced leverage and surplus capital to deal with legacy liabilities, instead of “dealing with a constrained balance sheet.” It could also fund a return of cash to shareholders, they added, maintaining a buy rating on the stock with a target price of 80 pence.
The deal also closes a chapter of uncertainty and disruption for the company, which has been absorbing pressure over what to do with its U.S. units for the best part of two years. Add to that the damage done by the pandemic and it’s clear that relief is in the air.
With U.K. restrictions on track to be fully lifted in June and the rest of Europe lagging behind, domestic travel is set to surge this summer, providing another boost to FirstGroup and its stock after a tough couple of years.
