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Why Greyhound Bus's Biggest Shareholder Hates British Trains

Chris Bryant

(Bloomberg Opinion) -- Coast Capital LP, a New York hedge fund, tried and failed on Tuesday to oust the board of directors of FirstGroup Plc, an under-performing bus and train company whose assets include the Greyhound intercity bus network. Wisely, FirstGroup’s chairman Wolfhart Hauser saw the writing on the wall and resigned anyway, but not before both sides had publicly disparaged the other’s credentials and track record in an unedifying clash of the capitalist classes.

In theory, the vote clears a path for the company’s CEO Matthew Gregory to implement his plan to refocus its operations on North America, where margins are better, and to sell Greyhound. Yet 25% of the votes cast supported removing Gregory from his position (other directors fared even worse). It’s telling that the share price has fallen 12% since just before his new strategy was announced last month. The battle over who should lead FirstGroup, and how to win around its long-suffering shareholders, isn’t over.

The ritzy venue for Tuesday’s shareholder gathering, the Grand Connaught Rooms in Covent Garden, is a world away from FirstGroup’s humdrum but important activities, which include bus and train services in Britain and yellow school buses and Greyhound coaches in the U.S.

The company’s 100,000 employees were doubtless unsettled when the American private equity group Apollo Global Management LLC made an approach last year, which the company rejected. Now FirstGroup’s senior managers and its top shareholder, Coast Capital, say they want to break up the group but they can’t agree on how to do it.

The status ​quo is no longer an option. ​In an age of climate change, congestion and aging populations, mass transit should be a money-spinner. In reality, budget airlines have undercut demand for long-distance bus travel and a buoyant labor market has caused driver shortages. Meanwhile, running train franchises in the U.K. is a recipe for trouble because of infrastructure problems, timetable issues and industrial action.

The upshot is that FirstGroup is a hodgepodge of assets that consumes lots of capital for little reward. There are few synergies that justify keeping it all together, which explains why it has performed worse than peers such as National Express Group Plc. which exited rail in 2017.

Coast Capital didn’t help its own activist cause by calling on the management to buy back shares, sell and lease back assets and restart dividend payments. That all smacked of financial engineering rather than trying to get to the heart of the business’s problems.

FirstGroup has good reason to not want to use its cash on investor payouts. It’s saddled with large pension and insurance burdens and 900 million pounds ($1.1 billion) of net debt. Transport contracts are prone to nasty surprises: The company has booked 250 million pounds of provisions on onerous rail contracts over the past two years, which contributed to 400 million pounds of losses. Cash flow is volatile.

The hedge fund is on safer ground in calling for a swifter exit from the British rail activities. Gregory, who was finance director before taking the top job last year, has spread confusion by announcing his pivot to the U.S. while still bidding for the U.K.’s West Coast mainline rail franchise. The share price is unlikely to recover much unless it jettisons that British political and regulatory risk. The hard-left Labour Party leader Jeremy Corbyn hopes to re-nationalize the railways should he win power.

Selling Greyhound probably won’t deliver too many proceeds, so FirstGroup’s transformation might be a slow one. Shareholders have been waiting long enough already. The company’s shares have fallen 85% since a 2007 peak and are roughly where they were in 2013 when it raised capital

Hence Coast Capital’s desire for a clean separation of the U.S. and U.K. businesses is understandable even if pension obligations complicate the picture. If Gregory can’t offer shareholders a brighter and more bankable future than this, Tuesday’s schism won’t be the last.

To contact the author of this story: Chris Bryant at cbryant32@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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