FirstGroup Falls as Dividend Delayed by Share Sale: London Mover

FirstGroup Plc, the company stripped of Britain’s premier U.K. rail route in 2012, fell the most in 18 years after halting its dividend to focus on a 615 million-pound ($936 million) rights offer and avert a credit downgrade.

The stock tumbled 30 percent, exceeding the 21 percent drop on Oct. 3 when Aberdeen, Scotland-based FirstGroup was forced to surrender the West Coast train contract. The three-for-two offer of 723 million shares is priced at 85 pence, a 62 percent discount to the 223.80 pence closing price on May 17.

FirstGroup, whose Chairman Martin Gilbert is to leave after 17 years on the board, has been monitoring its capital requirements since the government relieved it of the 5.5-billion-pound London-Scotland rail franchise, citing flaws in the assessment process. The U.K. company said today the rights offer will help it retain an investment-grade credit rating, remove balance-sheet constraints and ease spending plans.

“The proceeds of the equity raising will give us the flexibility and capital confidence to focus on the work that needs to be done to create long-term value,” Chief Executive Officer Tim O’Toole said. The company aims to remain a dividend-paying stock and the share sale should help it establish a “progressive” policy on investor returns, he added.

FirstGroup shares closed at 155.6 pence in London in the biggest drop since at least June 1995. The stock has declined 26 percent this year, giving a market value of 750 million pounds.

Dividend Plan

The company’s debt more than tripled to 2.2 billion pounds in 2008 after it bought Greyhound bus operator Laidlaw in the U.S. Net debt stood at about 2 billion pounds as of March 31, 8 percent higher than a year earlier,

FirstGroup is rated BBB- at Standard & Poor’s and Fitch Ratings, the lowest level above junk, with S&P saying in October it might opt for a downgrade because of the weakening balance sheet. The debt includes about 1.4 billion pounds of bonds maturing between 2018 and 2024 and 390 million pounds-equivalent of term loans, according to data compiled by Bloomberg.

No final dividend will be paid for the 12 months ended March 31 or first half of fiscal 2014, according to a statement.

Payments should resume with a final dividend for that year totaling as much as 50 million pounds, subject to the company meeting “business expectations,” FirstGroup said, with a dividend cover of 2 to 2 1/2 times to be targeted thereafter.

Rail Commitment

The rights-offer is fully underwritten, with Goldman Sachs and JPMorgan Cazenove as acting joint sponsors, bookrunners and corporate brokers. Bank of America Merrill Lynch is also joint bookrunner and HSBC is joint lead manager.

The selling price represents a 39.5 percent discount to the theoretical ex-rights price, according to FirstGroup. That’s comparable with a TERP of 36 percent for a share sale at Thomas Cook Group Plc last week, Edward Stanford, an analyst at Oriel Securities in London, said in a note to investors.

FirstGroup said it’s continuing talks with the U.K. Department for Transport about the extension of its First Capital Connect, First Great Western and First TransPennine Express franchises, and remains “committed to retaining a leading position in the U.K. rail market.”

Still, the “real long-term opportunity” lies in a business recovery program focused on the company’s U.K. bus division, where it’s mid-way through a 100 million-pound disposal program, and First student, which runs yellow school buses in the U.S., O’Toole said. FirstGroup also owns the Greyhound bus brand.

Virgin Victory

Virgin Trains, controlled by billionaire entrepreneur Richard Branson, was told it can keep the London-Scotland West Coast route following the probe into the FirstGroup award.

O’Toole said at the time that FirstGroup had bid in good faith and in strict accordance with terms set by DfT.

FirstGroup posted a pretax profit of 172.4 million pounds for the year to March 31, down almost 37 percent from a year earlier. Stanford, who predicted a figure of 170 million pounds, said the results “yielded no surprises.”

Chairman Gilbert will stand down once a successor has been appointed, the company said.

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