FirstGroup, the Aberdeen-based transport group led by its chairman Martin Gilbert, confirmed on Monday that it made an approach for smaller, embattled National Express on June 19.

But, National Express’s newly appointed chairman, John Devaney, and his chief executive, Richard Bowker, believe they can go it alone and have firmly rebuffed First Group. They are hoping, instead, to launch a £400 million rights issue.

This is not the first time the two companies have been linked as merger partners: there was talk three years ago of doing a £3 billion, nil-premium merger.

This time, however, FirstGroup made its opportunistic all-share merger proposal to National Express, after talks broke down between the British government and National Express over a bail-out of its London-to-Edinburgh East Coast Mainline franchise.

“No bail-outs in rail” is the government’s stance on the matter. No surprise there, then, when the coffers over at Treasury are empty.

“National Express now faces the choice of either racking up huge losses at East Coast or defaulting on the franchise, which would mean exiting UK rail altogether,” believes UK broker Collins Stewart.

National Express has been particularly hit hard from the cost of the East Coast line. To pay the government £138 million per year, it needs annual passenger revenue growth of at least 9 percent. It has only managed 0.3 percent in the first quarter.

That doesn’t put National Express in a very good position, when it has around £1.2 billion of net debt on its balance sheet. Indeed, its shares have more or less collapsed over the course of the year by around 70 percent, despite being confident that it will meet its renegotiated debt covenant tests tomorrow.

Advised by JPMorgan Cazenove, FirstGroup is clearly exploiting the situation, given that up until this point its strategy had always been focussed on cash generation and organic growth while it lumbered under a £2.5 billion debt pile.

“Without rail and with a sensible balance sheet structure – our sum-of-the-parts points to a fair value of around 500p for National Express,” says Collins Stewart. That’s about 70 percent above where the company’s share price is currently.

Buying National Express would make First Group into the UK’s biggest transport company. Failing that, there are plenty of other companies out there that might look to do a deal during these hard times: Arriva, Go-Ahead, and Stagecoach all come to mind.