Stagecoach Plummets as U.K. Grabs Rail Franchise, Seeks CashBy and
Department for Transport says company has breached covenants
Secretary: ‘No question of anyone receiving a bailout’
Stagecoach Group Plc plunged after the U.K. reclaimed ownership of a train artery connecting London and Edinburgh, questioned the company’s financial state and promised no bailouts on the loss-making route.
The shares fell as much as 14 percent in London, the most since June 2016. Stagecoach has lost 200 million pounds ($279 million) on the East Coast line since winning the contract in 2014, and was told last week that it had breached a key financial covenant, the Department for Transport said Tuesday.
The government said it will open up bidding to find a new operator for the 400-mile route, which Stagecoach runs with Richard Branson’s Virgin Trains. In the meantime, the U.K. may ask Stagecoach to keep offering the service in a short-term, not-for-profit arrangement, or take over the franchise directly.
Asked whether such a re-nationalization of the line is likely, Prime Minister Theresa May’s spokesman James Slack said the government will be guided by “what is in the best interest of the traveling public and of the taxpayer.”
The Stagecoach contract’s demise fuels a U.K. debate over privatization that’s intensified after the collapse of engineering contractor Carillion Plc and troubles at outsourcing companies including Capita Plc. Britain has moved a number of services to profit-making firms seeking greater efficiency, but in some failures costs have been passed to taxpayers. Transport Secretary Chris Grayling defended his handling of the East Coast route in Parliament Monday.
“Stagecoach got its numbers wrong. It overbid and is now paying a price,” Grayling said. “There is no question of anyone receiving a bailout. Stagecoach will be held to all of its contractual obligations in full.”
Stagecoach blamed its woes on a challenging economic environment and state-backed Network Rail Ltd., which it said hadn’t delivered agreed track upgrades. The Perth, Scotland-based group is pursuing claims against the infrastructure firm “for sustained poor performance,” according to a statement.
The East Coast franchise was originally meant to last eight years. That period was shortened to 2020, but Grayling had recently warned that Stagecoach was unlikely to manage until then. The situation has worsened with the company unable to continue beyond a “very small number of months,” he said.
Britain’s rail network, privatized in 1994 in one of the final selloffs of state assets begun under Prime Minister Margaret Thatcher, has become a political football in the last few years, with Labour Party leader Jeremy Corbyn breaking ranks with more moderate predecessors by saying he’ll take over the system should he be elected premier.
With polls consistently showing high public support for re-nationalization, critics of the Conservative government say it has gone easy on franchise operators to minimize the political fallout of even a brief spell under state control for failing routes. The East Coast line was directly run by the government from 2009 after National Express Group Plc defaulted on its contract, before Stagecoach and Virgin took charge in 2015.
Stagecoach will be held to its obligations, and there will be no impact on the railway’s day-to-day operations or staff, Grayling said. However, he’s been criticized for awarding the company a new deal to run the London-Glasgow West Coast route, Europe’s busiest inter-city railway. It’s also on a shortlist of bidders for a new franchise in central England.
There has been a “hardening” of the government’s negotiating position over the East Coast line, “coinciding with increased media and political scrutiny around government contractual relationships with the private sector,” Stagecoach said.
Shares of Stagecoach traded down 6.4 percent at 136 pence as of 1:35 p.m. in London, valuing the company at 779 million pounds, after earlier falling as low as 125 pence.
— With assistance by Alex Morales