FirstGroup shareholders see the value of their investments slashed, but chief executive says group can now grow from a ‘position of strength’

FirstGroup chief executive Tim O’Toole has announced a £615m rights issue to remove the “spectre” of financial weakness he inherited from the previous management team.

The new funding will stabilise First’s balance sheet by enabling it to reduce its £2bn debt pile –
a result of the 2007 acquisition of the US bus group Laidlaw – by up to £350m. It will also provide an additional £200m for the group’s ‘transformation programmes’ over the next four years.

The extra investment funds will contribute to the introduction of new ticketing systems on the UK bus fleet, further funding for additional new buses in the UK, expansion of US shuttle bus services and a complete revision of Greyhound’s legacy IT system.

“This really is a decisive moment for FirstGroup. It’s a time for me of greater clarity and confidence than I’ve had in all the time I have been here, and in fact I would have to say in the years before that,” O’Toole said. “In one fell swoop we are going to remove the spectre from the balance sheet that has haunted this company since 2007 and that has created uncertainty that we could face our challenges and still deliver our promises.

“I believe shareholders will grasp this vision of cutting to the chase and creating a company that can grow from a position of strength.”

The rights issue in June will offer shares at 85p – a 62% discount on First’s 223p share price on May 17, prior to the announcement, and a 40% discount on the expected 140p share price following the issue. First’s shares duly fell to 155p.

Despite the dilution of the company’s value, City analysts welcomed the move. “For the first time in over five years, investors will be able to focus on the very real recovery prospects within the group,” Oriel Securities commented.

Espirito Santo said that the fundraising should “remove all material concerns about the group’s balance sheet” and give management “flexibility to invest more effectively to accelerate the turnaround of its underperforming units, UK bus in particular”.

O’Toole has previously resisted calls from analysts to consider turning to investors for an injection of new funding. However, with credit rating agencies planning to downgrade First’s rating from investment grade to ‘junk’, O’Toole’s hand was forced.

“I would have preferred not to force this [rights issue] on my shareholders, this is a sacrifice on their part,” he said. “We recognise that, and the approach I pursued was to try to do this [strengthen First’s finances] operationally if at all possible.”

He added that First had assessed the impact of operating with a lower credit rating and also considered selling one or more of its major divisions. However, in each case First concluded that alternative action to a rights issue would not deliver value.

He also reiterated the difficult nature of his inheritance, highlighting shortcomings in the management of both the UK and US bus divisions which had contributed to the group’s financial weakness. He said First’s original plan during the acquisition of Laidlaw had been to reduce debt by selling the Greyhound coaching business which came with the larger school bus operation. However, an offer from Stagecoach had been turned down.

 

Further analysis on FirstGroup can be found inside the latest issue of Passenger Transport:

First’s pre-tax profits plunge 87% to £37m
Large falls in UK bus and rail profitability responsible for drop

New chairman sought as Gilbert departs
Co-founder of group is proud of achievements

Dividend suspended
Group won’t return to high dividend growth policy

Group aims to double UK bus profitability
FirstGroup’s UK bus division hits low point as profit margin falls to 8%, but chief executive Tim O’Toole has greater confidence about the future

New Glasgow network launch
SimpliCITY network to ‘reclaim Glasgow’s streets’

Local bosses for South West
Restructuring will see return of local MDs

 

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