FirstGroup hammered as government ditches West Coast rail deal - UPDATE

LONDON (ShareCast) - After announcing on Tuesday that it was confident in securing the West Coast rail franchise before the end of the year, FirstGroup (Other OTC: FGROF.PK - news) has discovered that the Department for Transport (Euronext: IXSTP.NX - news) (DfT) has dropped the contract competition.

Shares were down 15.3% at 206.7p in the opening hour on Wednesday.

In a statement on the governmental department's website, Transport Secretary Patrick McLoughlin announced that the competition to run trains on the West Coast Main Line has been cancelled "following the discovery of significant technical flaws in the way the franchise process was conducted."

Virgin Rail, the joint venture between Stagecoach and Virgin Group which has run the West Coast franchise since 1997, saw its £4.8bn bid to renew the contract bettered by FirstGroup's £5.5bn bid in August.

The outbid party had since accused the DfT of not following its own rules in deciding to grant FirstGroup the franchise and launched a legal challenge. Virgin boss Richard Branson blasted the decision as "insane".

In a statement on Wednesday morning, the DfT said: "[Today's] decision means that the DfT will no longer be awarding a franchise contract to run the West Coast service when the current franchise expires on December 9. It is consequently no longer contesting the judicial review sought by Virgin Trains Ltd in the High Court."

The DfT said that the flaws relate to the way the procurement was conducted by officials; "An announcement will be made later today concerning the suspension of staff while an investigation takes place."

McLoughlin has ordered two urgent independent reviews of the matter and the wider DfT rail franchise programme.

"I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process.

"A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held," he said.

Unsurprisingly, FirstGroup said that it was "extremely disappointed" about the decision, saying that it had not idea that there were any issues wit the letting process.

"The DfT have made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT's terms. Our bid would have delivered a better deal for West Coast passengers, the taxpayer and an appropriate return for shareholders," the transport firm said.

Meanwhile, Stagecoach released a statement this morning, saying: "Stagecoach also notes the DfT's plans to conduct independent reviews into both the specific InterCity West Coast competition and rail franchising more widely. We will be in discussions with the DfT regarding these developments and will update the market as appropriate."

Stagecoach's shares were up 1.31% at 287p this morning.