The right route for National Express

August 3, 2009

NATIONALEXPRESS/    It’s hard to get too excited about bus and coach travel. So why is there so much interest in taking over British bus and rail group National Express?
    Buses, including ferrying kids to school, and coaches are relatively recession proof. National Express ran into trouble by running more than a billion pounds in debt by expanding too far in the U.S. and Spain. It also over-bid for a British rail franchise, the east coast main line, and ended up such big losses that it was forced to surrender it.
    The business faces a potential liquidity crunch. It must repay a 540 million euro loan maturing in September 2010, which is daunting given its market capitalisation is only 515 million pounds. Moreover its two other rail franchises are under threat if the government tries to exercise a “cross-default” clause because of the east coast surrender.
    These mistakes cost its chief executive, Richard Bowker, his job. They now threaten its independence, with opportunistic bidders — including its largest shareholder, a private equity firm and its biggest competitors Stagecoach, FirstGroup and Go-Ahead — all sniffing around.
    The latest bidder to declare an interest, Spain’s Cosmen family, which already holds some 18.5 percent of National Express, has even teamed up with a private equity bidder, CVC, in order to offer cash. The Cosmens know the value of the Spanish business. After all, they sold Alsa to National Express in 2005.
    There is more than an air of vultures descending. After all, broker UBS puts a sum-of-the-parts enterprise value of almost 1.6 billion pounds on National Express, while Cazenove reckons it is worth 1.8 billion to 2 billion pounds. Strip out the debt and the equity is worth 530 to 909 million pounds, with a per share value of 350 to 530 pence.
    That’s above the current price of 344 pence. It also puts into perspective a putative offer price of 400 pence, which is the level at which the National Express board is reported to be willing to start talking.
    Fear of being lowballed may explain why shareholders are talking about stumping up for a rights issue of as much as 350 million pounds ($586 million) rather than cashing out.
    This would eliminate the liquidity crunch risk and buy National Express some time, while the company appoints a new chief executive. It would eliminate the need for a fire sale.
    Whether investors are serious about shutting bidders out and letting National Express trade on to recovery remains to be seen. It could of course just be a negotiating tactic to squeeze out a higher price.
    It will be intriguing to see how the Spanish, or indeed any of the other bidders, react.

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