Investors are expecting FirstGroup’s new chairman, John McFarlane, to have a material impact on strategic direction over the coming months

FirstGroup’s new chairman John McFarlane is expected to undertake a wide ranging review of the company’s operations to establish whether aspects of its businesses should be pared back and how improved financial performance can be delivered more rapidly.

It is understood that major shareholders were left “underwhelmed” by a briefing from First’s senior management held in the wake of proposals by Sandell Asset Management that US operations should be sold or ‘spun off’.

Rather than focusing on a defence against Sandell’s plan, the briefing aimed to justify the group’s current turnround strategies for UK Bus and US operations. More detail of the company’s plans were set out, however City analysts remain to be convinced that the target to achieve 10% profit margins in the US school bus operation and UK bus division by 2017 is sufficiently ambitious.

“Investors want management to be given strong encouragement to realise value sooner and there is an expectation that the new chairman will be effective in doing so because of his track record elsewhere,” Passenger Transport was told. “Investors are expecting him to have a material impact on the strategic direction of the company and no doubt we will see that in the coming months. They are happy to give him, as opposed to the company, some time.”

It is understood that a number of major shareholders would be likely to support a scaling back of the US school bus division to raise profit margins and focus management attention on the more successful parts of the business. First revealed at the briefing that 36% of US school bus contracts are low profit margin (below 5%) and that it would not renew them unless higher returns could be achieved. The future of Greyhound’s Canadian routes is among the other areas that could come under initial scrutiny.

“FirstGroup only have a certain amount of capital and management time so they may need to make hard-nosed decisions to sacrifice some businesses to save the best,” a senior City analyst commented. “Making those sort of decisions is what leadership is about.”

At UK Bus, it is expected that McFarlane will consider whether there is a need to achieve double digit-margins quicker than planned. Potentially, this may require further sales of under-performing companies.

“A 10% margin target is punchy compared to the 5% they are getting at the moment,” the analyst added, “but it’s not getting into new territory for the bus industry as a whole.”

 

McFarlane share deal

FirstGroup’s new chairman John McFarlane has committed to take his annual £250,000 fee by receiving shares in the company. FirstGroup said the move underlined his confidence in its long term prospects and would align McFarlane’s actions with the interests of shareholders. McFarlane, who took over as chairman on January 1, has committed to hold the shares he receives for as long as he remains a director of the company.

 

Further coverage can be found inside the latest issue of Passenger Transport.

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