LONDON (Reuters Breakingviews) - Apollo’s Greyhound bet looks past UK politics. Transatlantic bus and rail company FirstGroup has rejected an approach from the U.S. buyout giant. The offer is bold given the backlash against Britain’s private rail operators. But the company’s American operations, which include the iconic long-distance buses, may hide some value.
Private equity groups might be expected to steer clear of any company involved in running Britain’s railways. Opposition leader Jeremy Corbyn has vowed to nationalise rail operators if he wins power. Meanwhile, the public is increasingly dissatisfied with large private companies running essential services.
None of this deterred the firm run by Leon Black from proposing an all-cash offer which FirstGroup rebuffed. Although the terms of the potential deal were not disclosed, the transport group’s share price jumped 7 percent on Wednesday and a further 3 percent on Thursday morning, lifting FirstGroup’s market value to 1.3 billion pounds.
FirstGroup has suffered some setbacks. It has not paid a dividend for five years, and warned in February that Greyhound’s business was facing increased competition from low-cost airlines. Even so, Apollo may see value in the U.S. operations, which include running yellow school buses and public transport, as well as the inter-city bus group.
Liberum analysts reckon the three, which brought in almost 60 percent of FirstGroup’s revenue in the six months to September, have an enterprise value of around 2.6 billion pounds, based on 2018 forecasts. That’s roughly equivalent to the combined worth of FirstGroup’s debt and equity, even after the recent share price spike. In other words, the British bus and rail operations are thrown in for free.
Even if Apollo was able to persuade FirstGroup’s board to accept a deal, however, it would face other obstacles. Authorities might demand that the buyout firm put more money into FirstGroup’s pension schemes. And the British government can veto a change of ownership of unpopular rail operators, which charge some of the highest fares in Western Europe. If Apollo renews its interest, it will have to apply a hefty UK political discount.
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