LONDON A consortium led by Spain's Cosmen family has walked away from National Express (NEX.L), deciding not to mount a takeover bid after spending a month poring over the British bus and train operator's books.
National Express shares by over a quarter, as months of takeover speculation drained out of the stock and investors fretted over what had spooked the prospective bidders.
But Cosmen, National Express's biggest shareholder, did throw its conditional support behind the heavily indebted company's alternative of an equity fundraising, in which it is expected to seek about 350 million pounds ($568 million).
Last month, Cosmen and private equity partner CVC Capital Partners approached National Express with a proposed 765 million pound offer worth 500 pence per share, an improvement on a previous 450 pence approach.
News the proposal had been withdrawn sent National Express shares sliding 25.07 percent to 352.9 pence by 1330 GMT.
"The collapse of the CVC/Cosmen approach raises concerns about what was found during due diligence and whether or not their lenders were prepared to be supportive," said Gerald Khoo, analyst at Arbuthnot Securities.
But sources involved in the deal said raising loans to fund the mooted takeover had not been a problem.
"The consortium looked at the books for some time and decided they were unable to proceed with a bid," said one source close to the bidding consortium. "There were absolutely no problems with raising the financing."
The company granted access to its books on September 11 and on September 25 gave the consortium more time to examine them.
A banker involved in putting together financing for the deal also said debt levels had not been a stumbling block.
"We felt the financing was doable and were in positive discussions with CVC," said the banker who asked not to be named. "The market would definitely have financed this deal at the kind of leverage we were looking at."
Despite a leveraged loan market that has seen little activity throughout 2009, buyout house CVC agreed on Thursday to buy central and eastern European brewing assets from ABInBev (ABI.BR), lining up a club loan from 11 banks for 690 million euros ($1.0 billion) -- the largest in Europe this year.
Sparse debt has hampered private equity dealmaking, but buyout firms have also been cautious about investing due to unclear earnings outlooks.
"Some elements cropped up during due diligence that meant they couldn't justify the price," a third source said.
National Express became a takeover target earlier this year after struggling to lower a debt pile of almost 1 billion pounds and announcing it would walk away from its flagship East Coast rail franchise due to mounting losses.
Shares in Stagecoach (SGC.L), which had been eyeing National Express's British rail and bus operations as part of the Cosmen-led approach, were down 4.4 percent. National Express shares were at their lowest since July 23.
Stagecoach said it was no longer in talks with CVC/Cosmen but analysts at both Arbuthnot and Killik & Co said they would not be surprised if the company made a fresh approach for some National Express units independently of the consortium.
"In our opinion, an equity fundraising alone does not fully address the balance sheet problems faced by National Express," said Arbuthnot's Khoo.
"We do not believe National Express can credibly refinance or raise new equity without removing the uncertainty surrounding the future of the East Anglia and c2c (UK rail) franchises."
Such disposals may help get the company back on track given that analysts doubted its plans to turn to shareholders for a cash injection would be enough to fix its balance sheet.
A 540 million euro credit facility maturing in September 2010 is also likely to need refinancing.
Andy Brough, fund manager at Schroders which holds 2.79 percent of National Express, said it was prepared to back a 350 million pound fund raising while Panmure analysts put the size of any injection of shareholder funds at around 400 million.
As for rival transport company FirstGroup, Jonathan Jackson, head of equities at Killik and Co, said he doubted it would make a fresh approach after dropping plans for a bid in July.
"We believe it is highly unlikely that FirstGroup will get involved again," Jackson said, pointing to ongoing uncertainty over the future of National Express's rail franchises.
(Additional reporting by Raji Menon and Tessa Walsh; Editing by Dan Lalor)
($1 = 0.6157 pound = 0.6702 euro)