FirstGroup: US disposals are the start of a long journey

School’s out for FirstGroup. The UK multinational transport group sold the bulk of its US businesses, including profitable school bus division First Student, for £3.3bn ($4.6bn) to EQT on Friday. Funds will go towards paying down debts — an urgent requirement. But the move also means a sharper focus on core UK bus and rail services. 

Transport businesses were some of the hardest hit by last year’s Covid-19 lockdowns, wiping up to 70 per cent from the value of listed companies. UK rail operators, of which FirstGroup is the largest, were already struggling before the crisis. The rail franchise system that was in place encouraged over-promising and penalised under-delivery on contracts. This has now been scrapped under emergency government measures. Delivery of safe and reliable returns for investors, if they can be achieved, would be more fitting for a business that aims to do the same for its customers. 

Along with school bus division First Student, municipal transport business First Transit is also included in the EQT deal. Proceeds to FirstGroup will be £2.2bn after deductions that include debt transfers and pension contributions. Almost £1bn of the total will go towards paying off debts at FirstGroup. That will result in gross debts of £245m, or net debts of £100m once remaining cash is included. Shareholders will receive £365m of the proceeds or 30p per share — roughly a third of the current share price. The expected sale of intercity bus service Greyhound will complete the group’s exit from the US. 

Shareholders need to keep a tight grip on this ride. It is not yet clear what system will permanently replace the UK’s franchising system, which allowed operators to bid for the rights to rail routes. Regular dividends remain a distant prospect. The company hopes that they will arrive by 2023. But revamped regulation for UK rail operators should smooth the journey along with the tidier balance sheet. Current proposals suggest a lower margin business, but one that come with lower risks.

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