Great Western Coffee Shop

http://uk.news.yahoo.com/firstgroup-plots-route-500m-rights-issue-203138369.html#9JqF2zU

Big pension pot problem too.....

Further details on this story -

From The Telegraph (http://www.telegraph.co.uk/finance/newsbysector/transport/10065514/FirstGroup-chairman-Martin-Gilbert-set-to-resign-amid-600m-rights-issue.html):


From The Scotsman (http://www.scotsman.com/business/management/gilbert-to-step-down-at-firstgroup-1-2936417):

No surprise then that we've had no announcement on the Greater Western management contract from October 2013.

First Group after as big a return as possible, and the DfT wondering whether First Group are solvent enough?

Could explain why DaFT are keen to put EC back in the private sector before the next election. Wouldn't do to have two of the biggest InterCity franchises in the public sector come the election now would it?

For a govt desperate to avoid any more cock-ups in the rail franchising arena, I would imagine they would be anxious to be certain about the financial stability of First Group before giving them the management contract. After all, the EC franchise problems started when GNER's parent, Sea Containers found itself in a little financial difficulty. 

Hmm. Market value quoted in the article is ^1 billion. They now want a rights issue to raise ^500 million (^600m accordng to the Telegraph), or half the current book value of the company, to help reduce debts of ^2 billion, or double the book value of the company. The UK bus profit margin has fallen to "only" 8%, a figure the big supermarket chains can only dream of. The Chairman is about to stand aside, as soon as a new figurehead can be appointed. Now, when it comes to commercial finance, I admit that I am no Robert Maxwell. But the picture painted is not a rosy one, and I shall not be dipping my hand to my pocket to invest just now. It will be interesting to see what the Sporting Pink has to say about all this come results day. It all sounds a bit like "Give me a tenner, and I'll pay you part of the fifty quid I owe you". The Telegraph reports that the rights issue comes amid fears of a cut in First's credit rating by Standard and Poor's, presumably to sub-standard and p*ss-Poor. If that isn't just a bit of journalistic speculation, it could have an effect on interest rates charged on that debt.

With all due respect to Martin Gilbert and Tim O'Toole, First doesn't have any one person with such a high profile as to be a household name on a par with Richard Branson, Stelios Haji-Ioanou, or the Suter-Gloag siblings. Whether that is a good thing or a bad thing, I don't know. First have suffered in the UK because of the WCML debacle, as well as the recession hitting their core bus areas, just as government subsidies have been cut. In their favour is that bus and rail routes cannot be provided by Amazon, but that shouldn't lead to complacency.

I'm beginning to think that we may just be all in this together. Us, the bankers, and the millionaires in the Cabinet.

Shares currently down 48.8p to 175.00p... ouch!

Ended the day at 155p, a cool 30% down on the day, with no final dividend or interim dividend next year. That's certainly not a good place to be in. Will be interesting to see how the market responds to the rights issue. Throwing good money after bad is a phrase that comes to mind.

All areas of the business are profit making albeit small at the moment, anyone suggesting insolvency or dft waiting etc is nuts, the company can service its debt and intends to spend ^1.5 billion across all areas of the business over the next four years, i some how think the First group haters are hoping their demise is near but i think not.

If they drop much further, I may phone a stockbroker. Or Ladbrokes. Either way, it may be worth a punt.

Pre tax profit down by 87%. Debt increased to ^2Bn, which in the words of First Group themselves is at a level that puts their investment grade credit rating in jeopardy.  ^80m of bus disposals last month.  Profits of under ^40m, but intend to invest ^1.6Bn in the next five years, yet only raising ^600m which is to reduce their debt to more manageable levels. So where does the ^1.6Bn come from? I also wonder how much of their investment is actually replacement of assets (typically buses).

I'm not suggesting they are about to go bust, but I could understand if DaFT would be just a little cautious at the moment. Though I'll probably be proved wrong any day now with the announcement of a management contract.

I don't think it's a case of 'First Group haters'. At least not in this thread. I was very careful to make the second part of my earlier post a question rather than a statement.

Just some serious questioning of the financial position the company finds themselves in. The award of the management contract for the Greater Western franchise would certainly go some way to steadying the ship.

I certainly think that DfT now holds the upper hand in negotiations - FirstGroup can't afford NOT to win both the management contract or the refranchise contract - so the DfT can ask for more....

If the market reacts like that to the rights issue, can you imagine the reaction to losing the refranchise?....

That last thought would send shivers down many spines, and not just in the boardroom at FGW. I'm not as sure about the first bit, though. Losing the Great Western franchise would be a huge blow to both finance and prestige. Not winning the WCML gig would probably not be disastrous, as the actual loss is "only" the cost of the franchise tender.

All is not well on another level. On a great many of the services to and from London, you would need a crowbar to get more passengers on. The railway has never been so busy, and fare levels are a constant source of disgruntlement amongst passengers. So if costs are fixed, and revenue is as high as it can be with the available kit, are we to believe that weather problems have taken such a huge toll on FGW? If so, all the other TOCs will be in the same boat. I don't think they are, though.

While the franchise uncertainty has not helped, the issue is not rail...

http://www.telegraph.co.uk/finance/newsbysector/transport/10069610/FirstGroup-has-been-haunted-by-a-deal-agreed-in-2007.html

I thought there was more to this than meets the eye. Have First reached for the stars too soon? TBH, I think any problems they have are made greater in their effect by the whole franchising business generally. Look at it dispassionately.

A bus company with humble beginnings in a management buyout of Badgerline has grown over the years by merger with other deregulated bus companies, and acquisition of other privatised bus services. Having reached a certain size, it is given the chance to turn over rockstar sums of money by running rail services carrying far more passengers to whole new destinations, several hundred at a time. You don't have to buy your own kit (although First do own some train sets), you can stick your brand everywhere, and suddenly you are a major player, with the clout to branch out abroad.

There is a downside. You do this for a few years, then have to spend an awful lot of time and money preparing a tender to do it all again. In the twinkling of an eye, you can end up back with just the bus routes again, but with a CEO who used to run Transport for London, ^2 billion of debt, and a lot of angry shareholders, many of them corporates, pension funds, and the like. Nightmare.

Let's hope it doesn't come to that. First suffered a lot of problems on the railway that were not of their own making during the earlier years of the GW franchise, and they were not all foreseeable. I wonder if any other company could have done any better given the same circumstances?

Discuss.

I think some who criticise First (and I am not without guilt in this) are not too particular about distinguishing between the franchised company, the DfT and Network Rail. For most people, the franchised railway is beyond their understanding and a failure in service is always the fault of whoever owns the logo on the train they want/are on.

The fact that First needs to raise capital in itself is of little concern to me: that's a function of capitalism.  I think the whole franchising system is the problem and for the ordinary punter whether it's First or another conglomerate is neither here nor there.  For shareholders it's a different matter.  As long as central government, of whatever political hue, is wedded to this madly expensive system of running the passenger railway, we will always be subject to what FTN calls 'the downside' when companies find the costs outweigh the benefits to them.  I have said before, I am not in favour of returning to the model under which British Rail was run, but other European models seem to have a good mix of public control and private enterprise.

As FTN rightly points out, some of First's bad publicity came about because of interference from outside the organisation in the early days of the current franchise.  However, they knew what they were taking on and so must share some of the responsibility. 

On a small point:


Wasn't Badgerline a management buyout of the country section of Bristol Omnibus when it was sold off by the National Bus Company?

Close enough for the cigar! Badgerline was indeed the country section of Bristol Omnibus, its more sophisticated (ha!) urban cousin being CityLine. These were direct descendants of the original 1875 Bristol Tramways Company, formed by Sir George White to operate a horse-drawn tram service from Upper maudlin Street to Blackboy Hill. Some say that the service has deteriorated from then on. 12 years later, by merger with Bristol Cab Co, it became the Bristol Tramways and Carriage Co Ltd, a legal title that survived subsequent changes of ownership, and even nationalisation, until 1957. Bristol Corporation had the an option to buy the company, which it never exercised. From 1937 until 1978, services were operated jointly with, and under the control of, Bristol Corporation. Other pre-nationalsation owners included the GWR, which had sold its share to the Tilling Group, which eventually sold its ownership to the Government.

Privatisation nationally came in 1980. The National Bus Company, the government's operating arm, divided the city and country bus services into two different companies, City Bus, and Bristol Country Bus. Two years later, the country company was rebranded Badgeline, and the following year was transferred to Badgerline Ltd, and sold to its managers. City Line, and the remnant was called, was sold to Midland Red West, later bought by Badgerline. First Bus was born in 1995, when Badgerline merged with Grampian Bus. The rest is history, with a certain amount of geography, and a lot of mathematics.

The full story has many offshoots and side-tracks, some of which, such as Clifton Rocks Railway, turned out to be cul-de-sacs. In every identity, the company has known good times and bad times, and has taken steps forward by innovative use of technology. To my mind, the pace of change has slowed over the past three decades. Before anyone says that the old days were the best, however, my first experience of Bristol buses was in 1977, when the last bus of the day from Broadmead to Brislington, where I was then staying until I found somewhere permanent, failed to show. Shortly after, I had a trip that took longer than walking would have, by virtue of a long circuitous route. When I lived in Redland and worked in Bedminster, it was as quick to walk as to get a bus. Things improved with new routes and more buses, but even in the modern day of First, when I lived in Bishopston and worked in the Centre, I walked, because the timing was predictable, whereas by bus it wasn't. And I could get a pint on the way home.

Only Bristol City Services. The jointly-owned buses were identified by the prefix 'C' in front of their fleet number, e.g. WHW814 (a 1956 Bristol KSW6G with ECW H32/28R bodywork) was, if I remember correctly, C8373.

There was a similar numbering scheme for Gloucester City buses, with a 'G' prefix; Bath buses had the fleetname 'Bath Services' but no prefix. Then there was the (presumably wholly-owned) Cheltenham District Traction, which kept its separate identity by going Poppy Red when the rest of the fleet adopted NBC leaf green.

Ah; takes me back...

Edit: Typo - silly me, it was 1956 not 1957. It was the YHT's that entered service in 57. I blame the aluminium saucepans.

Thanks for the details gents.  I have several books on the subject, but you have put down the difficult to remember history very succinctly.

If I had the money I'd take a punt on some 85p shares in the forthcoming rights issue. Only for a quick profit mind and not because I think First Group is a worthwhile long term investment. It seems likely that not all current shareholders will take up their 'first refusal' on the rights issue, so many new shares will be available publicly at somewhere between the rights issue price and current share price. Although the rights issue may well drag the actual share price further down, particularly if 'first refusal' take up is low and/or current shareholders sell on their rights to the new shares. At around 125p currently there is a quick buck to me made from rights issue shares if the actual share price stabilizes. But there's also a very real risk that the rights issue gamble fails and the actual share price drops below the rights issue price.

First Group are struggling to 'sell' the rights issue to institutional investors, so may find that they fail to sell all the approx 700 million shares in the rights issue on 'first refusal'. The sale is however underwritten, so First Group get the cash injection regardless, but if the underwriters have to make up any shortfall that won't help First Group's credit status.

Choppy waters ahead and sharks may be circling. I wouldn't rule out a takeover, merger or even bankruptcy.

The nature of underwriting a share issue is potentially dangerous. Those underwriters don't do it for free, you know. The bigger the risk, the higher the price. A fair chunk of any money raised by the rights issue will be spent on the costs of the rights issue.

I think I read FG are guaranteed ^585m regardless leaving the difference as cost for the underwriting.

I cancelled the Sporting Pink as an economy measure, so I'm not sure of the way this is going. The cost of underwriting depends on the risk the company is prepared to take, if I remember my limited training in commercial law. A company can seek to underwrite the entire proposed issue at a price per share, or can assume that it will sell at least a certain number, and only pay to underwrite the rest. Having unsold shares in a rights issue is a big no-no, as it devalues every share in the company.

From the company's announcement of May 20th:


PS: the share price is 124p - about half what it was a month ago, but has levelled off after its big drop.

Soon after rail privatisation CLPG decided to purchase a few shares in the main rail TOCs holding companies so that it could have a voice at company AGMs if wanted, an investment of nearly ^200 in total. This has never been taken up so nearly 3 years it was decided to sell the shares . So after nearly 15 years of holding the shares something around ^170 was realised, not what could be considered a good privatisation investment. Looking back to when the First Group shares were sold, the price obtained was 379 pence per share. It sounds a good price compared to the above quoted price of 175 pence a share and the rights issue price of 62 pence a share, even though a loss was made.

It is said that investment in shares is a long-term investment, not a fast buck. It is not said how long-term.

Short term is that FirstGroup shares dropped another 4p today, closing at 120.4p

Two big 'sells' at the end of the day with nearly 600,000 shares being dumped.