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Serco to Run Scotland Overnight Trains in Orders Recovery

Serco Group Plc, the services company recovering from punishment for mishandling U.K. government work, won a 15-year franchise to enhance and operate overnight sleeper trains linking London with Scotland.

Serco will manage the Caledonian Sleeper starting in 2015, with revenue of as much as 800 million pounds ($1.34 billion) over the contract, the Hook, England-based company said today in a statement. Serco takes over from FirstGroup Plc, a Scottish company that has run the service for a decade, and will add “pod flatbeds” and a brasserie-style club car.

“This is a notable win for the group and the new CEO,” Hector Forsythe, an analyst at Oriel Securities, said in a note to investors. Serco will have few upfront costs to take over a service that represents about 1 percent of its revenue, he said.

Rupert Soames, a former chief executive officer of Aggreko Plc, took the helm at Serco this year after Christopher Hyman resigned amid a U.K. government inquiry. Britain’s largest government outsourcing provider was barred from consideration for some public contracts last year after overcharging for electronic tagging of criminals.

Serco, the operator of London’s Docklands Light Railway, rose 4.1 percent to 369.4 pence at the close of trading in London, for the biggest gain in three months. That pared the stock’s plunge over the last 12 months to 42 percent. FirstGroup, based in Aberdeen, rose 0.1 percent.

Revived Credibility

“This is a small franchise, but it demonstrates Serco’s credibility in this market,” analysts at Liberum said today.

Joe Brent, an analyst at Liberum, has a hold recommendation on the stock, as does Forsythe, who said he doesn’t expect “quick fixes” as Soames sorts out Serco’s financial controls.

For FirstGroup, which has run the Caledonian service as part of the ScotRail regional network, losing the newly separated contract is “another rail disappointment within a week” after the U.K.’s largest train-operating franchise was awarded to a venture led by Go-Ahead Group Plc, according to Joe Spooner, an analyst at Jefferies.

Go-Ahead and Keolis won the seven-year contract a week ago to run the Thameslink, Southern and Great Northern route network, including London-area commuter trains now operated by FirstGroup that serve the City financial district.

Coming Franchises

Important decisions loom for FirstGroup, including an Essex Thameside contract decision expected in the next few weeks, and East Coast and ScotRail awards expected in October, Spooner said. The failure to win the TSGN and Caledonian contracts may suggest that FirstGroup is “being disciplined in its bidding,” he added.

The Caledonian service, which has four cross-border trains a night, accounts for about 2 percent of revenue from ScotRail, FirstGroup said in a statement today.

“We will continue to provide sleeper passengers with the best possible service until the new franchise commences, and will work closely with the new operator to ensure a seamless handover,” Chief Executive Officer Tim O’Toole said in a statement.

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