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National Express Back on M&A Block as Investor Queries Strategy

National Express Group Plc (NEX), the U.K. travel company that fended off three takeover bids in 2009, faces pressure from its biggest shareholder to switch strategy after struggling to win government contracts and lift earnings.

Elliott Advisors Ltd., which said this week it’s seeking to overthrow the National Express board, wants the company to adopt a new growth plan, wring value from a Spanish unit that delivers a quarter of sales and evaluate a merger with Stagecoach Group Plc (SGC) or FirstGroup Plc (FGP), a person familiar with the campaign said.

National Express’s train business has been cut to a single route after it last month failed to make the shortlist to retain a London commuter franchise, leaving it focused on buses in Britain, Spain and the U.S. The stock is unchanged this year after a 30 percent jump in 2010, when it rebounded from near- collapse following the loss of the marquee East Coast rail unit.

“National Express needs something to drive the business, but if you look at their units it’s hard to see where that will come from,” said Karl Burns, an analyst at Shore Capital in Liverpool with a “hold” rating on the stock. “The shares haven’t done much and people have factored in the recovery.”

Elliott holds 17.5 percent of National Express stock and said April 12 that its campaign for a boardroom shuffle is backed by Jorge Cosmen, National Express’s second-biggest investor with a 17.4 percent holding after taking a stake through the sale of his Madrid-based Alsa bus business in 2005.

Investor Briefing

The unit of New York-based hedge fund Elliott Associates will brief investors on its plans in London today, spokeswoman Jenny Davey said, declining to comment further.

National Express Chairman John Devaney, who joined the London-based company in April 2009 and was in charge when it spurned approaches from CVC Capital Partners Ltd., Stagecoach and FirstGroup, could be one casualty of a shakeout.

Devaney, who also helped recruit Chief Executive Officer Dean Finch, said in a statement on April 4 that he has written to investors asking them to reject three board appointments to be proposed by Elliott at their annual meeting on May 10. He said that the nominees should instead take part in a wider appointment process that the company has already instigated.

Elliott will press for a board better aligned to National Express’s assets, according to the person familiar with its plans, who wouldn’t be named because the demands aren’t public.

In addition to the Spanish business, the company gets 22 percent of sales from a North American school-bus unit, but has only one non-British board member, the person said.

Rail Exit

In the U.K., National Express is no longer a “multimodal” transport operator, being effectively out of rail after it was ejected from the bidding for the Greater Anglia franchise that serves London Liverpool Street station, according to the person.

The loss leaves National Express with only C2C, a franchise that operates a single line from the town of Southend, at a time when U.K. rail assets are attracting takeover approaches.

Deutsche Bahn AG last year bought Arriva Plc for 1.6 billion pounds ($2.6 billion), giving it the CrossCountry and Welsh franchises. The German company already owned Chiltern Trains, London Overground and the top U.K. rail-cargo company.

Paris-based SNCF, Europe’s biggest rail company, made a failed approach for Arriva via its Keolis SA division and is bidding to run the main London-Scotland West Coast route, while Dutch operator NV Nederlandse Spoorwegen is the running for the Greater Anglia franchise on which National Express lost out.

U.S. Ambitions

Elliott also wants to press for expansion into U.S. markets beyond schools, mirroring Stagecoach, with its long-distance Megabus brand, and FirstGroup, which owns Greyhound Lines Inc. and East-Coast commuter service BoltBus, the person said.

Chairman Devaney, 65 in June, said in his statement that National Express is “now a high-quality business” on a “sound financial footing” and well positioned for “long-term growth.”

That’s after the company raised 360 million pounds from a share sale to pay off debt in December 2009 after rejecting bids that had been supported by the Cosmen family.

Rebecca Mitchell, an external spokeswoman for National Express, said that the company had no further comment.

National Express has a market value of 1.29 billion pounds and a share price that’s 4.2 times earnings before interest, tax, depreciation and amortization, Bloomberg data shows.

That’s less than the price-to-earnings ratio of 5.6 at Perth, Scotland-based Stagecoach, owner of South West Trains, Britain’s busiest rail franchise, but higher than the 2 times at Aberdeen-based FirstGroup, which runs trains to western England.

Elliott reckons public-transport companies should have multiples reflecting a steady cash flow, the person said, like airport operators such as Fraport AG, owner of Frankfurt’s main hub, and Aeroports de Paris, which trade at 6.5 times earnings.

“Management consider, and I agree with them, that they have done a pretty good job of pulling National Express back to the mainstream from what was a pretty dire position,” said Paul Hickman, a London-based analyst at Peel Hunt with a “hold” rating on the stock. “I do think the company is fairly valued.”

To contact the reporter on this story: Steven Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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