UPDATE 3-Activist investor calls for breakup of UK's FirstGroup
By Kate Holton and Chris Vellacott
LONDON Dec 11 (Reuters) - U.S. activist investor Sandell Asset Management demanded British transport operator FirstGroup split off its U.S. business, which owns the yellow school buses that operate across the country, in order to invest in its domestic arm.
The hedge fund's public attack caps a torrid year for FirstGroup, the leading transport operator in Britain and North America that handles more than 2.5 billion passengers a year.
In May the company had to raise 615 million pounds ($1.0 billion) to avoid its credit rating being cut to "junk" and scrapped its final dividend to fund investment.
Sandell, which owns just over 3.0 percent of FirstGroup, wrote to the directors urging them to spin off and list the U.S. business on the stock market.
It also called for the group, which was hit last year by the loss of a lucrative deal to run Britain's West Coast Main Line railway, to sell the Greyhound bus service that transports 18 million passengers across America each year.
Sandell said on Wednesday a break-up would enable FirstGroup to fund a much-needed investment programme in its British bus business and to bid from a position of strength when the next round of rail franchises come up for tender.
Sandell said his proposed U.S.-listed group would have an equity value of $2.4 billion even after supporting $2 billion of debt, the Telegraph newspaper reported on its website. Sandell also told the paper that Greyhound could fetch $840 million to 850 million, including debts, as it was "ideal for a private equity buyer". ()
"We have been getting calls from other shareholders who really like our plan," Sandell told the Telegraph, "There's nobody who has said it's a bad plan, they're just trying to understand it."
FirstGroup rejected the proposal, saying it contained structural flaws and inaccuracies.
Analysts said it was too soon to sell the U.S. business, with the American economy still recovering and many of those who used FirstGroup's U.S. buses yet to feel any improvement in their fortunes.
"You would want to sell against a backdrop of a strong U.S. economy, not an improving one," Shore Capital analyst Martin Brown said, adding that until then most shareholders would want the British business to remain part of a larger group as it also recovers.
"FirstGroup is suffering a similar fate to National Express earlier in the year," another of FirstGroup's ten largest shareholders told Reuters. "(National Express) were pressurised to do a break up by another U.S. hedge fund, Elliott. Clearly U.S. investors think there is some value to be shaken out of these businesses."
In that instance, National Express stood firm, before Elliott Advisors sold down half of its near 20 percent stake.
FirstGroup has struggled to reduce its borrowings, much of which were incurred by the 1.9 billion pound acquisition of U.S. bus business Laidlaw in 2007. The group had said at the time that it would consider selling the Greyhound service, but never did as potential buyers disappeared during the subsequent financial crisis.
At the same time, FirstGroup maintained an aggressive dividend policy, which it had to scrap in May this year to fund a capital programme to drive growth, margins and returns.
Shares in the Scottish group have fallen 75 percent since the Laidlaw deal in February 2007.
According to Thomson Reuters data, FirstGroup had a net debt to core earnings ratio of 2.8 percent in 2013, higher than the industry average of 2.1 percent which includes Stagecoach , National Express and Go-Ahead.
FirstGroup said its objectives to improve growth and return cash, would in the long run offer superior value for shareholders compared with alternative proposals, which it said it had considered.
Shares in the group were up 5.6 percent in afternoon trading on Wednesday, valuing it at around 1.5 billion pounds.
Shore Capital's Brown also noted that investors would want to wait and see what incoming chairman, John McFarlane, would do with the company when he replaces Martin Gilbert in January, who is stepping down after 27 years.
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