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Stagecoach derails after losing South Western rail franchise to FirstGroup

A joint venture between FirstGroup and MTR will operate the network from August this year until at least August 2024

south west trains
Stagecoach has operated the franchise since 1996

Stagecoach Group plc (LON:SGC) was one of the biggest fallers on the FTSE 250 as it lost the South Western rail franchise after more than 20 years.

The firm said it was “disappointed” that it wasn’t able to extend its tenure as operator, with the Department for Transport instead awarding the contract to fellow British transport company FirstGroup plc (LON:FGP) and Hong Kong-based MTR Corporation.

The joint venture will operate the rail network – which runs trains from London to Exeter, Bristol and beyond – from August 2017 to at least August 2024.

First MTR South Western Trains – the official name of the JV – is investing £1.2bn in the network over the course of its contract.

This will include 22,000 extra seats into London Waterloo each morning and 30,000 extra seats out of the famous London station in the evenings.

There will also be a fleet of 90 new trains, while it is promising customers that journeys will be quicker across the board.

“Our successful bid will deliver the tangible improvements that customers and stakeholders have told us they want from this franchise,” said FirstGroup chief executive Tim O’Toole.

“Passengers can look forward to new and better trains, more seats and services, quicker journey times, improved stations and more flexible fare options.”

Secretary of State for Transport, Chris Grayling added: “FirstGroup and MTR will deliver the improvements that people tell us they want right across the South Western franchise area.”

Shares in FirstGroup added 3% to 127.5p in early deals, while Stagecoach shed 2% to trade at 196p.

What the brokers are saying

“The award of the franchise to the FirstGroup-led JV is positive for the group, although how much so depends on how optimistic it has been in its assumptions,” said Liberum analyst Gerald Khoo.

“We see the failure to retain the South Western franchise as disappointing and negative for Stagecoach. The group has run the franchise since it was first privatised in 1996 [and] it remains to be seen how management reacts.”

Khoo reckons there is the possibility that Stagecoach may be discourage from bidding for further rail franchises in the future, although he also highlights that two of its existing contracts are up for renewal next year.

“It is possible that [management] may reach a similar conclusion to National Express and determine that it is not possible to win new rail franchises on acceptable terms.

“It is also possible that Stagecoach reserves judgement, with two more franchises where it is incumbent due for replacement in 2018 (East Midlands and Virgin West Coast).”

--Updates for share price and broker comments--

Quick facts: Stagecoach Group PLC

Price: 140 GBX

Market: LSE
Market Cap: £770.26 m

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