National Express heads for the buffers

July 30, 2009

You might have thought that the Spanish had learned from observation that British transport businesses are much riskier than they look. Ferrovial’s purchase of airports operator BAA has turned into a financial plane crash, but perhaps it’s the hope of clawing back some of its paper losses on National Express that has encouraged their fellow Spaniards in the Cosmen family to consider buying the whole business.

National Express is barely sustainable in its current form. It has infuriated the British government by walking away from a big rail franchise when it couldn’t sustain the price it had recently agreed to pay. As a result, it faces the prospect of having to fight to hold onto the other two, in the knowledge that these are the last it will ever get.

On Thursday it scrapped the dividend and the directors added that there was “significant doubt” about the company’s ability to continue as a going concern. They are having to struggle on without the wisdom of Richard Bowker, who as chief executive drove them into this rusty siding, and a share price that went from 10 pounds to 3 pounds during his three years at the controls.

There’s a curiously binary outlook now. An inciteful analysis from Pali International can’t see any value for a bidder paying more than the current 344 pence, since that implies an unattractive internal rate of return of around 17 percent. Even that assumes a new owner can persuade the government to view the company as a bona-fide owner of rail franchises again. Brian Souter at rival Stagecoach is keen to buy bits of the business, but he’s not known for over-paying, and there have been no talks. As Pali concludes; “We would not regard 300p as a floor if [the bidding consortium] walks.”

National Express used to be a decent, if rather dull, business running long-distance buses. As so many others have done, its board was seduced by the idea that a dependable cash flow was crying out for a “more efficient” (ie debt-laden) balance sheet. The shareholders know better now. It’s no wonder the Spanish are cross enough to try and take it away.

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