LONDON British bus and rail operator Stagecoach's (SGC.L) proposed takeover boosted shares in rival National Express (NEX.L) but gains were capped by fears that regulatory hurdles and debt deadlines could scupper a deal. Analysts said a tie-up would make a lot of sense for debt laden National Express and help Stagecoach's earnings but some suggested National Express might instead have to push ahead with a capital hike given pressure on its balance sheet.
National Express said on Sunday that Stagecoach had made a "highly preliminary" approach, proposing an all-share deal in which National Express shareholders would own no more than 40 percent of the combined group.
The new group would have a market value of about 1.7 billion pounds ($2.8 billion), based on Friday's closing share prices. (here )
National Express shares were up 9 percent at 394.1 pence by 9:33 a.m. EDT (1333 GMT) off a peak of 399.8 pence but still well below levels above 470 pence seen over the last month. Stagecoach was down 0.6 percent at 155.6 pence.
National Express slid over 20 percent on Friday after a consortium led by Spain's Cosmen family walked away from a proposed 765 million pound offer that valued the group at 500 pence per share.
Stagecoach's approach also implied a value of up to 500 pence a share for National Express said analysts at Collins Stewart while Panmure Gordon & Co put the figure at 490p and Arbuthnot Securities at 480p.
"National Express remaining independent looks highly unlikely," Collins Stewart analyst Andrew Fitchie wrote, pointing to its lack of a chief executive, the need to cut a 1 billion pound debt pile and weakness at its U.S. business.
"We would not support an independent National Express. We see scope for substantial value creation for Stagecoach in a bid," he said, raising his rating on both companies to "buy."
Fitchie said he expected a tie-up would boost earnings 5 to 12 percent before cost cuts with scope for savings on UK bus operations and at head office adding another 10 to 20 percent.
RIGHTS ISSUE POSSIBLE
Time is key, as National Express has a 540 million euro credit facility due to mature in September 2010.
Investec analyst Joe Thomas said he thought it unlikely a bid would emerge given Stagecoach has said further work and analysis is required to determine the details of any offer and National Express is in a hurry to end months of uncertainty.
"It is uncertain that a deal will complete between the two operators given the time constraints involved. We consequently think a rights issue within the next few weeks is the most likely outcome," Thomas said, putting the likely size of any cash call at 300-350 million pounds.
National Express, which has been mulling a rights issue for months, repeated its view that it would have to tap shareholders for cash should no deal emerge and indicated it was not in a position to delay much longer.
"The board believes that it is now necessary to rapidly conclude this phase of potential corporate activity to avoid further disruption to the business and to allow the group to secure additional equity funding before the end of 2009," the company said on Sunday.
Stagecoach's options are also limited after it previously ruled itself out of bidding for National Express in response to a September 11 deadline set by Britain's Takeover Panel while any deal could face scrutiny by competition authorities.
The Office of Fair Trading is already investigating UK bus operators over practices it believes are preventing or distorting competition and ruled in September that Stagecoach's proposed acquisition of a small bus operator in the northwestern town of Preston could harm passengers.
Stagecoach itself had 340 million pounds in debt at the end of April and might have to structure a deal involving a potential rights issue of its own and possible disposals.
"We would be concerned for Stagecoach if it were to propose retaining all the existing National Express businesses ... rather than breaking the group up," Arbuthnot's Gerald Khoo said pointing to the trading challenges faced by National Express.
(Editing by Jason Neely)