National Express rejects FirstGroup bid approach

29th Jun 2009 09:49

National Express has rejected an unsolicited bid approach from fellow bus and rail group FirstGroup."National Express confirms that on 19 June 2009 it received a highly preliminary approach regarding a potential share for share merger on unspecified terms from FirstGroup," a statement read Monday."At the present time, the board is focused on implementing a number of initiatives to strengthen the group and does not consider it appropriate to enter into discussions with FirstGroup."FirstGroup, valued at about £1.7bn, described the approach as envisaging "a merger to maximise the potential of the two companies." National Express is currently worth about £443m.It continued: "The board of FirstGroup continues to believe that there is significant industrial and commercial logic in a combination of the two companies, however FirstGroup would like to emphasise that there can be no certainty that an offer for National Express will be forthcoming."Jonathan Jackson, head of equities at Killik Capital, called the bid "opportunistic", coming at a time when National Express is struggling to cope with high debt and the government's refusal to negotiate the terms of its loss-making East Coast rail franchise, which runs between London and Edinburgh.The group, due to issue a trading update on Wednesday, agreed a deal to renegotiate its £1.2bn debt earlier this month, but a £400m rights issue is on the cards.FirstGroup remains Jackson's preferred holding in the sector and, although they're likely to be "fairly volatile" in the weeks ahead, says buy on weakness. Others think FirstGroup's move suggests a deal on the East Coast franchise could be close, believing it wouldn't be interested if something couldn't be done.National Express has to pay £1.4bn to the government for the right to run the franchise until 2015, with annual instalments rising to £138m this year from £85m in 2008.Its bid forecast was based on annual passenger revenue growth of between 9% and 10%, far more than the paltry 0.3% reported for the first three months of 2009.When the deal was agreed in August 2007, the company expected the franchise to generate total annual revenue of £600m in its first full year.