FIRSTGROUP PLC
agreement to acquire bus operator RATP
London
FirstGroup
plc (the `Group') is pleased to announce that it has signed an
agreement to acquire RATP Dev Transit London Limited and its
subsidiaries (`RATP London') from RATP Développement SA (`RATP
Dev') for an enterprise value of £90 million (the
`Acquisition').
The
Acquisition will see the Group enter the London bus market with a strong position and
will further grow and diversify the Group's revenue. RATP London is
one of the principal bus operators in the capital, with a c.12%
market share, comprising:
-
10 depots
across Central and West London
(four owned and six leased);
-
a fleet of
c.1,000 buses of which a third are fully electric;
-
c.3,700
employees over 80% of whom are drivers;
-
c.90
Transport for London (`TfL') route
contracts, typically of seven-year term; (weighted average
remaining contract life of 3.3 years)
-
revenues
of £271m for the year ended 31 December
2023; and
-
an
experienced management team with a proven track record of
developing and implementing a comprehensive turnaround plan that
includes enhanced bid discipline and improved operational and cost
performance
The
enterprise value is underpinned by c.£100m of physical assets
including freehold property of c.£50m.
The
Acquisition will be financed with £45 million from the Group's
existing cash reserves and the assumption of RATP London's asset
backed vehicle finances leases (c.£45m).
Following
completion of the Acquisition, the Group anticipates:
-
the
Acquisition will be broadly earnings neutral in FY 2025 and FY
2026; onerous contract provisions totalling c.£40-50m will be utilised over several
years;
-
as the
route contract portfolio evolves over the next five years, annual
revenues are expected to grow to £300-350m, with operating margins in line with
historical London levels of
c.6-7%;
-
looking
ahead, in addition to the measures included in the current
turnaround plan, the Group has identified a number of potential
synergies that could further enhance profitability;
-
operating
cash outflows of c. £30m, after bus operating lease payments and
capex, in the first two years of ownership, following which the
business is expected to be operating cash positive from FY 2027
onwards;
-
RATP
London's current management team will transfer with the business
and are expected to be retained
post-acquisition.
The
Acquisition is subject to French government approval (in its
capacity as the ultimate owner of the business) and is conditional
on TfL consent to the change of control. The Group anticipates
completion of the Acquisition in H1 Calendar Year 2025.
Graham Sutherland, FirstGroup Chief Executive Officer
said:
"This is a
significant acquisition for the Group that will diversify our
portfolio and materially grow our earnings in the medium term. It
allows us to enter the London bus
market at scale and will also bolster our credentials as we
participate in future franchising opportunities across the
UK.
"We look
forward to continuing to build on our relationship with TfL and
welcoming RATP London's employees into the Group, to continue the
transformation of the business and to capitalise on the growth
potential in the London
market."
Investor
& Analyst webcast
A webcast for investors and analysts will be held at 09:00 (GMT)
today. To request the webcast details, please email
corporate.comms@firstgroup.co.uk.
To access the presentation slides, together with a pdf copy of this
announcement, go to www.firstgroupplc.com/investors. A recording of
the webcast will also be available on the website in due
course.
Notes
to Editors
Operational
and financial overview
RATP
London was formed through the consolidation of London United,
London Sovereign and London Transit bus companies. RATP London is
most prominent in West London, and
also operates in the north-west and south-west of the
capital.
RATP
London has c.3,700 employees and operates a fleet of c.1,000 buses
out of four owned and six leased depots, as well as a number of
smaller ancillary properties, in Central and West London. The four freehold depots have
existing use value of c.£50m. The freehold depots are located in
Fulwell, Hounslow, Shepherds Bush and Stamford Brook, with leasehold depots in
Edgware, Harrow, Hounslow, Park
Royal, Tolworth and Westbourne Park.
The
majority of the senior management team joined the company over the
last three years and have developed and implemented a comprehensive
turnaround plan for the business. Good progress has been made since
the implementation of the plan, both in enhanced bid discipline
with c.30 routes rebid over the past two years, including the early
termination of loss making routes at contract review dates as well
as improved operational performance and cost control, and workforce
stabilisation. This improvement in performance can be seen in the
TfL Q2 FY 2025 Bus Operator League Tables, with the three
subsidiaries occupying first, second and fourth place in the league
table for "operated mileage before non-deductible
losses".
RATP
London operates c.90 routes on behalf of TfL. These route contracts
typically have a seven year maturity with on average, c.13
contracts in the portfolio renewed each year. As the route contract
portfolio evolves over the next five years, the Group anticipates
that annual revenues will grow to £300-350m, with operating margins in line with
historical norms in London of
c.6-7%.
RATP
London reported group revenues of £271m for the year ended
31 December 2023. The Group
anticipates that the Acquisition will be broadly earnings neutral
in FY 2025 and FY 2026, after the utilisation of onerous contract
provisions of c.£40-50m that
recognise contracts entered into prior to 2022 and were
subsequently impacted by material labour market cost increases. The
Group will recognise these provisions on acquisition. The onerous
contract loss provision release matches the losses being incurred
on these contracts and will result in a broadly neutral impact in
the Group's profit and loss accounts.
Buses are
currently acquired under operating leases, which the Group will
review going forward. The Group anticipates aggregate capital
expenditure of c.£40-50m which
excludes bus acquisitions, over the first three years of ownership
relating primarily to depot electrification, charging
infrastructure, existing fleet replacement batteries, and a small
amount of spending on other non-current assets. The capex forecast
excludes the buses that may be acquired under operating leases and
this will be reviewed in the context of the Group's wider approach
to electrification.
TfL is
targeting an entirely zero-emission bus fleet by 2034 at the latest
and electrification is now compulsory in the bidding process. RATP
London has been an early mover in bus fleet and infrastructure
electrification, with a third of the fleet electric. The Group will
seek to capitalise on electrification expenditure efficiencies
through its existing capabilities and
arrangements.
The Group
anticipates operating cash outflows of c. £30m after bus operating
lease payments and capex, in the first two years of ownership, with
the business expected to be operating cash generative from FY 2027
onwards.
Looking
ahead, in addition to the measures included in the current
turnaround plan, the Group has identified a number of synergies
that could further enhance profitability. These include fuel and
electricity pricing, insurance, on bus advertising, materials
contracts, fleet purchasing, vehicle sale benefits through the use
of the Group's Ensignbus business, and through the merging of some
back-office functions. The Group will also consider the future
financing of electric buses, including the potential benefits of
bringing electric bus batteries into its joint venture with Hitachi
Zero Carbon.
Impact
on the Group's FY 2025 and FY 2026 financial
outlook
Should the
Acquisition complete in the fourth quarter of the Group's financial
year ending March 2025, it is
anticipated that its FY 2025 net capital expenditure will be
c.£125m and year-end adjusted net debt will be c.£110m. The Group
will also recognise additional IFRS16 lease liabilities of c.£60m
in FY 2025.
In FY
2026, RATP London is anticipated to make a small contribution to
the First Bus adjusted operating profit, at a lower margin, and the
Group's net capital expenditure is expected to increase to c.£125m,
with the majority of expenditure in First Bus electrification.
There will be an increase in the Group's interest cost of c.£6m,
including IFRS 16, relating to the Acquisition, and the Group's FY
2026 year-end Adjusted net debt is expected to be
c.£130m.
Share
Purchase Agreement terms
Under the
terms of the Share Purchase Agreement (`SPA'), FirstGroup plc will
acquire, through its wholly-owned subsidiary, First Bus Holdings
Limited (`First Bus'), the entire issued share capital of RATP Dev
Transit London Ltd and its three operating subsidiaries, London
Transit Limited, London Sovereign Limited and London United Busways
Limited, from RATP Dev UK Ltd (the `Seller'), a wholly-owned
subsidiary of RATP Dev. The consideration will be paid in full on
completion, subject to a normal post-completion true-up process.
The entire debt of RATP London will be assumed or repaid by the
Seller's group prior to completion, apart from the debt relating to
hire purchase and lease finance obligations (projected to be c.£45m
as at 31 December 2024) which are
expected to remain with RATP London at completion.
The Group
has provided a parent company guarantee to underpin the obligations
of First Bus under the SPA, and similarly the Seller's parent, RATP
Dev, guarantees the obligations of the Seller. The SPA includes a
customary suite of warranties and indemnities, subject to caps and
limitations as appropriate.
The Seller
is required to carry on operating and funding the business in line
with past practice in the period to completion. A limited suite of
transitional services will continue to be provided by the Seller
and its group for a short period post-completion under the terms of
a Transitional Services Agreement
(`TSA').
Satisfaction of the conditions is subject to a longstop date of
30 April 2025. The current management
team will transfer with the business and are expected to be
retained post-acquisition.
London bus market1
London is a £2.1bn bus market, accounting for around 46% of
the entire UK bus market. There are c.9,000 buses in London, with the market primarily served by
six major operators.
Bus
patronage is expected to continue to recover back to pre-Covid
levels, supported by modest population growth across London, further growth in tourist volumes,
continued declines in car utilisation and investment in the
expansion of the bus network. TfL's Business Plan expects bus
patronage to grow at c.4% per annum between 2025 and 2027,
recovering fully to pre-Covid levels by 2027.
Looking at
modal share, despite a slight shift towards the London Underground
and more recently, suburban rail networks, bus remains the primary
mode of transport within London,
with an average of 192 journeys per capita in 2023 (accounting for
>50% of all journeys made).
The size
of the London bus network has also
been resilient, with a broadly stable number of network miles
operated between 2012 and 2020, and only a very modest decline
between 2020 and 2024. This reflects the consistent levels of
funding allocated to support operators, with long-term funding
growth of c.3% per annum between 2004 and 2023 demonstrating TfL's
commitment to bus. In 2023 Bus accounted for approximately 25% of
total TfL operating expenditure (equivalent to £2.1bn per
annum).
Overview
of TfL contracts
London bus operations are entirely regulated by TfL, with
each individual route forming a contract which is bid for by
authorised private sector operators. TfL decide the contract
specifications for a given bus route, control ticket prices and
collects passenger revenue. Operators own the buses and depots, and
source and pay drivers to run routes. The proximity of the line of
route to the operator's depot and staff changeover facilities is
therefore key to maximising efficiency and being competitive on bid
price.
Individual
route contracts are tendered competitively by TfL, generally over
seven-year terms, resulting in a franchising model where there is
minimal risk of losing large parts of the business at one time, and
with a view to full decarbonisation of the fleet.
The route
contracts bear no revenue risk on the base price bid. Inflation is
allowed for based on 85% of revenue against which CPI is applied,
and TfL assuming 15% of bus operator cost base does not
inflate.
TfL is
entitled to make deductions for lost mileage (at a specified rate
per mile) where caused by reasons within the operator's reasonable
control (such as missing drivers or mechanical breakdown), and
fares payment irregularities (i.e. underpayment by passengers).
Operators are not penalised for lost mileage that is not within
their control, for example traffic or roadworks delays.
In
addition, operator performance is measured and incentivised /
penalised through quality of service indicators within the
contracts, known as Quality of Service Indicators (`QSIs'). Under
the QSI regime, bonus payments and liquidated damages are based on
the operator's performance against a defined minimum performance
standard of Excess Wait Times (`EWT') or a minimum percentage of
"On-Time" services. Bonuses are earned up to an annual maximum 15%
of contract payments (less any deductions for lost mileage) (the
`Contract Sum') for good performance, with liquidated damages for
poor performance capped annually at 10% of the Contract
Sum.
1 Source:
TfL data
Contacts
at FirstGroup:
Marianna
Bowes, Head of Investor Relations
Stuart
Butchers, Group Head of Communications
corporate.comms@firstgroup.co.uk
Tel: +44
(0) 20 7725 3354
|
Contacts
at Brunswick Group:
Andrew
Porter / Simone Selzer
Tel: +44
(0) 20 7404 5959
|
Contacts
at Panmure Liberum (Corporate Broker):
Nicholas
How / John More
Tel: +44
(0) 20 3100 2000
|
RBC
Europe Limited (Financial Adviser and Corporate
Broker): Philip
Turville / James Agnew / Jack Wood
Tel: +44
(0) 20 7653 4000
|
This
announcement contains inside information and the person responsible
for publishing the announcement is David
Blizzard, Company Secretary.
Notes
Legal
Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as
per DTR 6 Annex 1R: 3.1.
Forward-looking
statements
Certain
statements included or incorporated by reference within this
announcement may constitute 'forward-looking statements' with
respect to the business, strategy and plans of the Group and our
current goals, assumptions and expectations relating to our future
financial condition, performance and results. By their nature,
forward-looking statements involve known and unknown risks,
assumptions, uncertainties and other factors that cause actual
results, performance or achievements of the Group to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. No
statement in this announcement should be construed as a profit
forecast for any period. Shareholders are cautioned not to place
undue reliance on the forward-looking statements. Except as
required by the UK Listing Rules and applicable law, the Group does
not undertake any obligation to update or change any
forward-looking statements to reflect events occurring after the
date of this announcement.
About
FirstGroup
FirstGroup
plc (LSE: FGP.L) is a leading private sector provider of public
transport services. With £4.7 billion in revenue and around 30,000
employees, we transported almost 2m
passengers a day in FY 2024. We create solutions that reduce
complexity, making travel smoother and life easier. Our businesses
are at the heart of our communities and the essential services we
provide are critical to delivering wider economic, social and
environmental goals. Each of our divisions is a leader in its
field: First Bus is one of the largest regional bus operators in
the UK, serving more than 20% of the population in the UK with a
fleet of around c.4,800 buses, and carrying more than a million
passengers a day. First Rail is one of the UK's largest rail
operators, with many years of experience running long-distance,
commuter, regional and sleeper rail services. We operate a fleet of
c.3,700 locomotives and rail carriages through three DfT contracted
train operating companies: WCP (incorporating Avanti West Coast and
West Coast Partnership Development), GWR and SWR) and two open
access routes (Hull Trains and Lumo). We are formally committed to
operating a zero-emission First Bus fleet by 2035, and First Rail
will help support the UK Government's goal to remove all
diesel-only trains from service by 2040. During FY 2024 FirstGroup
was named as one of the world's cleanest 200 public companies for
the fifth consecutive year and
achieved Industry Top-Rated status for the first time with
Sustainalytics. We provide easy and convenient mobility, improving
quality of life by connecting people and communities.
Visit our
website at www.firstgroupplc.com and follow us @firstgroupplc on
X.