Stagecoach PLC (LON:SGC) "got its numbers wrong" when bidding to run the East Coast Mainline rail franchise, according to the UK’s transport minister, who said yesterday that the contract will end earlier than expected, sending the transport operator's shares plunging this morning.
In early morning trading, Stagecoach shares dropped 13.5% to 125.6p, albeit with the FTSE 250 index shedding 2.5% first thing as global markets slumped after an 1,100 point plunge overnight by the Dow Jones in New York.
In a statement to the House of Common’s on Tuesday afternoon, Chris Grayling said Stagecoach would continue running the London to Edinburgh line only for "a small number of months and no more".
The transport minister said the government was considering two approaches to continuing the franchise, with one option to allow Stagecoach to continue operating East Coast Mainline on a short-term and not-for-profit basis until a new contract is awarded in 2020.
Alternatively, he said, the franchise could be brought back under government control and be run by the Department for Transport through an operator of last resort.
It was re-privatised when Stagecoach and Virgin Trains signed a deal to run the line from 2015 to 2023, promising to pay the government £3.3bn to run the service.
Stagecoach owns 90% of the joint venture and Virgin owns the remaining 10%.
In November, the Department for Transport said Stagecoach and Virgin would withdraw from running the service three years early, in 2020, after running into difficulties.
Situation now "much more urgent"
But on Monday, Grayling told parliament the situation was now "much more urgent" and that new arrangements were needed "in the very near future".
He said: "The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price."
Grayling insisted that there was "no question of a bailout" for the transport company, adding: "Stagecoach will be held to all of its contractual obligations in full."
The transport minister added that Stagecoach was set to lose about £200mln, equating to more than 20% of its total market value.
Boss says Stagecoach “accepted our share of risk”
In a stock exchange statement after the market close yesterday, Stagecoach’s chief executive, Martin Griffiths commented: “Contrary to much misinformed recent comment, we have neither walked away from the East Coast franchise nor asked for, or received, any special treatment. We have accepted our share of risk agreed with the Government at the time the franchise was let.”
However, at the same time as the East Coast Mainline bombshell, Grayling also announced that another joint venture between Stagecoach and Virgin had won an extension to operate the West Coast Mainline rail service between London and Glasgow.
A Stagecoach subsidiary is also on the shortlist of bidders hoping to operate the East Midlands franchise, scheduled to begin in August 2019.
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