Activist investor Coast Capital has rubbished what it says are “half baked” plans by FTSE 250 transport operator FirstGroup PLC (LON:FGP) to sell off its Greyhound US bus business as part of a “rationalisation” of its portfolio.
Chad Tappendorf, a partner at the New York-based hedge fund, which owns a 9.77% stake in FirstGroup, told Proactive that the plan, which will see the company focus on its other US bus businesses First Student and First Transit, was “the height of folly”.
READ: Everybody off: activist calls for FirstGroup board to step down
“There’s not one individual [on the board] with any relevant transportation experience in North America. So how do they expect to operate these businesses better than their peers?”
Tappendorf added that he didn’t think investors trusted the board to deliver on a turnaround plan, which he said has “failed on every account”.
He highlighted that one of the company’s largest disposals last year, a real estate asset in Chicago, was sold for US$38mln despite the group receiving a US$50mln bid. Over the three months it took for the company to sign the contract, the buyer managed to renegotiate the price, ultimately costing investors 1% of the total market cap.
Additionally, the group’s Manchester bus operation, which it put up for sale in a cut-price offering in February, had resulted in a £16mln impairment charge.
Coast had also asked FirstGroup to stop bidding on UK rail franchises, Tappendorf said, describing them as “an enormous black hole of capital” and value destruction for shareholders.
WATCH: Coast Capital locked in battle over future of FirstGroup PLC
FirstGroup currently operates three rail franchises in the UK, Great Western Railway, South Western Railway (SWR) and the TransPennine Express.
Responding to the comments, FirstGroup said that the plans offered a “clear strategy” and was an executable plan that they would be able to deliver at pace.
“Our plans will create a more focused portfolio, and we see significant potential to generate long term, sustainable value and growth from our solid platforms in the North America mobility services sector.”
The group added that its UK rail business had made over £330mln in profits over the last five years with “good cash generation” and it was committed to delivering its existing franchises under existing contractual terms, while any future bids would need to have "an appropriate balance of risks and rewards".
Battle lines drawn
Coast Capital has been locked in a battle over the future of FirstGroup for many months as it tries to persuade shareholders to back its own vision for how to return the company to profit.
The most notable part of the plan is to get rid of six of the company’s eleven directors, including new chief executive Matthew Gregory and chairman Wolfhart Hauser, and replace them with seven of Coast’s own nominees, including former Tory transport minister Steve Norris as chairman.
While Coast has been perhaps the most vocal investor calling for a shakeup at the company, Tappendorf says FirstGroup’s other shareholders are “just as frustrated”.
“This board and management team have for years overpromised and underdelivered, shareholders want change. It’s not just us.”
Mixed results
The announcement of the breakup plan accompanied a somewhat mixed set of full-year results on Thursday.
FirstGroup narrowed its losses to £97.9mln from £326.9mln in the prior year while revenues jumped 5.7% on an underlying basis to £7.1bn.
While the company did cut its losses, the figure was dragged down by a number of large impairments, including a £145.9mln onerous contract charge from its SWR franchise and a £94.8mln self-insurance charge from the US.
In mid-afternoon trading on Thursday, FirstGroup shares were 4.1% higher at 114.9p.
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