Oct. 16 (Bloomberg) -- CVC Capital Partners Ltd. scrapped a 765 million-pound ($1.3 billion) bid for National Express Group Plc, sparking the biggest decline in the U.K. bus and rail company’s stock for eight years.

The buyout firm, which had made the offer in tandem with Spain’s Cosmen family, London-based National Express’s biggest investor, didn’t give a reason for the decision to withdraw, while saying that there had been no problem raising funds.

National Express said it’s now planning a share sale in the next few weeks in order to raise cash to pay down debt. Stagecoach Group Plc, which had planned to buy some of its rival’s U.K. bus and rail operations had a bid succeeded, said the assets are still attractive at the right price.

“Today’s development raises the possibility of a direct approach by Stagecoach,” said Ed Woolfitt, head of trading at Galvan Research in Truro, adding that the Perth, Scotland-based company is well-placed to buy National Express assets on “favorable terms” and that a merger is also a possibility.

National Express plunged 109 pence, or 23 percent, to 362 pence, the biggest decline since Oct. 22, 2001, reducing its market value to 554 million pounds.

Stagecoach fell 4.5 percent to 156.9 pence, valuing it at 1.13 billion pounds. Woolfitt said a deal with National Express would deliver immediate savings and boost profitability “before too long.” He reiterated his “buy” rating and 190 pence price forecast.

East Coast Failure

National Express became a takeover target after warning that its East Coast rail route between London and Scotland was running out of cash as the recession hurt demand for long- distance trips. Chief Executive Officer Richard Bowker, whose bid for the franchise required 10 percent annual sales growth, quit and the government said it would nationalize the route.

CVC and the Cosmens sweetened their approach to 500 pence a share last month and the U.K.’s Takeover Panel had twice extended an offer deadline to allow due diligence, with the latest period due to expire at 5 p.m. today.

The bidders, who are being advised by Citigroup Inc., probably withdrew because of concern about National Express’s 977 million pounds of debt, almost 500 million pounds of which is due before the end of next year, according to Manoj Ladwa, a senior trader at ETX Capital.

“The consortium clearly had second thoughts when looking at National Express’s debt commitments,” London-based Ladwa said in a note, adding that the transport company “will be gutted” by the withdrawal of the approach.

Rights Offer

National Express Chief Operating Officer Ray O’Toole said that while the offer had been attractive and acceptable, management’s preference had always been to remain independent. The company will speak with investors next week about a rights offer in the next few weeks, he said. It’s also looking for someone to replace Bowker and has candidates in mind, he said.

The Cosmen family plans to support an equity fundraising within “certain parameters” that they’ve communicated to the National Express board, CVC said in its statement today. The Cosmens, who began accumulating an 18 percent stake in the U.K. company after it purchased their Spanish bus business, declined to comment further, according to a spokesman in Madrid.

Under terms of their offer, CVC and the Cosmens had planned to retain control of National Express’s U.K. coach and North American school-bus operations and sell the U.K. bus and rail units to Stagecoach, the operator of South West trains, Britain’s biggest single rail franchise.

Opportunity

Stagecoach said today that it still views a purchase of the assets on the right terms as a “significant opportunity” to generate value for its shareholders. Spokesman Steven Stewart said the company stands by its statement of Sept. 3, saying it won’t bid alone for National Express without an agreed deal or a material change in circumstances.

National Express’s O’Toole said in an interview that there have been no communications with Stagecoach.

“The deal is potentially still on with National Express if they don’t want to do a heavily diluted rights issue,” said Karl Burns, an analyst at Shore Capital Group in Liverpool. A share sale will need to raise about 400 million pounds, he said.

Go-Ahead Group Plc, Britain’s biggest rail company by passenger numbers, declined to say whether it’s interested in National Express. FirstGroup Plc, which made an abortive bid earlier this year and has said it’s interested in the East Coast route, didn’t immediately respond to messages seeking comment.

Franchise Question

Much also depends on whether Gordon Brown’s government strips National Express of its two other U.K. rail franchises following the failure of the East Coast operation, Burns said.

Britain’s Department for Transport still regards so-called “cross default” of the company’s East Anglia and C2C operations as an option, according to a spokesman.

National Express plans to hand back the East Coast business before the end of the year and is prepared to go to court to oppose any move to seize the two units, which provide commuter trains to London, O’Toole said in the interview today.

The RMT trade union said in a statement that National Express has become a “shambles” and that the government should set a “clear and urgent timetable” to nationalize all three train businesses.

To contact the reporter on this story: Beth Mellor in London at bmellor@bloomberg.net

Last Updated: October 16, 2009 12:13 EDT