FirstGroup at war with shareholder over £3.3bn sale

Aberdeen-based bus and rail giant FirstGroup plc has become embroiled in a public dispute with its biggest shareholder Coast Capital LLC over the proposed £3.3 billion sale of its North American businesses First Student and First Transit to Stockholm-based investment firm EQT Infrastructure.

Coast Capital, which holds 13.77% of FirstGroup, has urged fellow shareholders “to vote against the proposed disposal of the company’s crown jewel assets, First Student and First Transit, unless the terms of the proposal are rapidly and substantively improved.”

FirstGroup responded late on Tuesday, saying its board unanimously recommends the transaction “as being in the best interests of all shareholders and recommends shareholders vote in favour of the sale at the General Meeting on 27 May.”

The Aberdeen firm said its board received financial advice from Rothschild & Co, J.P. Morgan Cazenove and Goldman Sachs in relation to the sale.

FirstGroup added it will consider “the potential for making further additional distributions to continuing shareholders, in addition to the proposed return of value to shareholders described in the sale announcement and circular.”

Announcing the deal on April 23, FirstGroup said the transaction allows it to make a £336 million contribution to its UK defined benefit pension schemes “and address other longstanding liabilities” including those relating to its Greyhound bus business, which is not included in the deal but remains up for sale.

The Aberdeen-based group said on April 23 that £1.34 billion from the deal would to be used to reduce debt, including a £300 million Covid Corporate Financing Facility repayment to UK Government, and to derisk other liabilities “including for North American legacy pensions.”

Rockefeller Plaza, New York-based Coast Capital claimed it “has already been contacted by many shareholders who express frustration with this deal, and proposed use of proceeds.”

Coast Capital claimed it has been approached “by alternative potential acquirers who were not given access to the process and continue to be declined access, due to a punitive ‘No Shop’ clause which the board has agreed to in the proposed SPA.”

The shareholder said the FirstGroup board “is now refusing to discuss First Student and First Transit with interested parties who are prepared to pay a (notably) higher price than book value for these assets, but who are afraid of publicly expressing their interest lest they be ruled out as potential bidders.”

Coast Capital said that under “this ill-advised proposal, the board seeks to over cash-collateralize liabilities, and stash cash away for management’s discretion which could, as management has put it ‘be released over time’.”

It claimed that “in light of management’s track record of mismanagement of assets and value destruction, shareholders cannot trust this board or management to retain shareholder’s capital …”

In a stock exchange statement late on Tuesday, FirstGroup said: “The Coast Capital statement contains numerous inaccuracies and speculations which the board would like to correct.

“The sale followed a comprehensive and competitive process in order to seek the best possible price for First Student and First Transit, which was well-publicised for more than a year (having been announced in March 2020).

“Through the sale process, the businesses were widely marketed and the group and its advisers actively engaged with more than 40 potential buyers.

“The exclusivity arrangements included in the sale agreement signed with EQT are in line with standard US practice, particularly following an extended and broad sale process.

“The board is aware of its fiduciary responsibilities to shareholders and continues to comply with them at all times.

“This process overseen by the board led to the agreed sale for a full strategic value, which looks beyond the pandemic and reflects the high quality and long-term nature of these assets.

“The group notes that the sale is described by Coast Capital as ‘at a significant negative premium to book value’, however the net proceeds on sale are above book value as at 30 September 2020.

“In the context of a competitive process to extract the most attractive proposal, an earnout structure was agreed for First Transit which would benefit continuing shareholders in the group.

“This reflects First Transit’s strong prospects for future performance, not least in light of the Biden Administration’s commitments to investment in infrastructure and public transportation.

“Under the earnout FirstGroup will receive up to a further £170m, payable on the third anniversary of the Sale (following an independent valuation), or sooner if sold to a third party.

“The group has a number of longstanding liabilities.

“As previously set out, in determining the use of proceeds the board has sought to balance returning value to shareholders while also making a necessary and substantial contribution to the UK pension deficit, reducing its debt (including repayment of Covid Corporate Financing Facility to the UK government) and addressing other longstanding liabilities.

“In parallel, the board carefully considered the appropriate capital structure and distribution policy for the ongoing group, and it concluded that a well-capitalised, de-risked balance sheet will provide the retained group with flexibility to navigate end market uncertainty at this point in the pandemic recovery, pursue its strategy going forward and support a progressive annual dividend from 2023.

“At the same time, the board has committed to keep the balance sheet position of the retained group under review and will consider the potential for making further additional distributions to continuing shareholders, in addition to the proposed return of value to shareholders described in the sale announcement and circular.”

In its statement, Coast Capital said: “Coast Capital, the largest shareholder in FirstGroup PLC, urges its fellow shareholders in FirstGroup PLC to vote against the proposed disposal of the company’s crown jewel assets, First Student and First Transit, unless the terms of the proposal are rapidly and substantively improved.

“The proposed transaction values these sector-leading assets at a significant negative premium to their book value, and is the result of a questionable and non-exhaustive sale process.

“The announcement of the proposed sale has led to a 23% share price decline in FGP’s stock – a notable and unacceptable underperformance against the sector.

“The inexplicably rushed window to vote in just 17 days, lack of fairness opinion, opacity around terms of the deal (with shareholders being forced to view the 160+ page SPA document in person during a pandemic) all point to a process that is unacceptable to shareholders, fails to maximize the benefit of proceeds for all stakeholders and make it intentionally difficult for new bidders to present superior offers.

“Moreover, shareholders stand to receive less than 12% of the proceeds from the transaction, in a timeline they do not control, in exchange for handing over an asset that accounts for 80% of the value of the company …”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.