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National Express Back on M&A Block as Elliott Queries Plans

National Express Back on M&A Block
National Expresss 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. Photographer: Jason Alden/Bloomberg

National Express Group Plc, 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 that it’s seeking to reshape National Express’s board, wants the bus and railway operator 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 or FirstGroup Plc, a person familiar with the campaign said.

National Express’s train business has been cut to a single route after it failed last month to make the shortlist to retain a London commuter franchise, leaving it focused on buses in Britain, Spain and the U.S. The stock has gained 3.7 percent this year after climbing 30 percent in 2010, when the company rebounded from near-collapse following the loss of the U.K.’s marquee East Coast rail line.

“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, whose 17.4 percent holding makes him National Express’s second-biggest investor. He obtained 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 said it would outline at least three strategic options for National Express in briefings for investors in London today. They include “redeploying assets” to invest in the U.S., as well as seeking a merger and selling key assets.

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, asked investors on April 4 to reject Elliott’s candidates for three board seats at the May 10 annual meeting. He said the nominees should instead take part in a wider appointment process that the company has already instigated.

Board Composition

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.

National Express’s removal from bidding for the Greater Anglia franchise that serves London Liverpool Street station left it 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 bought Arriva Plc last year for 1.6 billion pounds ($2.6 billion), Paris-based SCNF is bidding to run the main London-Scotland West Coast route and Dutch operator NV Nederlandse Spoorwegen is competing for the Greater Anglia franchise on which National Express lost out.

National Express faces “steep challenges to its U.K. businesses, in part due to the emerging liberalization and consolidation in the European mass transit market,” Elliott said today. “As a result, the markets that National Express operates in are set to become even more competitive.”

U.S. Expansion

Elliott also favors 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.

National Express said today that, while it agrees with some of the points raised by Elliot, “it fundamentally disagrees with Elliott’s strategic options which are focused on the short term.”

The company said in an e-mailed statement that it’s making “good progress” in its search for additional independent directors, and that Elliott’s attempt to appoint directors contravenes best corporate governance practice.

National Express also said in a separate statement that its business development team was pursuing a “significant pipeline,” of bids and other growth opportunities, and repeated its plea for shareholders to reject Elliott’s board candidates.

Share-Price Multiples

National Express has a market value of 1.33 billion pounds and a share price that’s 4.4 times earnings before interest, taxes, depreciation and amortization, Bloomberg data shows. The stock rose 2.3 percent to 260.1 pence at the 4:30 p.m. close of London trading, a 6.9 percent gain since March 29, when Elliott first said it was seeking to appoint new directors.

The price-to-earnings multiple is less than the 5.9 at Perth, Scotland-based Stagecoach, owner of South West Trains, Britain’s busiest rail franchise, but higher than the 1.9 times at Aberdeen-based FirstGroup, which runs trains to western England. Shares in Stagecoach rose 0.4 percent today after jumping 5.1 percent yesterday amid bid speculation.

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 and 6.7 times earnings, respectively.

“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.”

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