Global rail, bus and coach firm National Express is in talks to merge with Stagecoach – although the deal would in effect be a takeover.
If the deal goes ahead, the combined group running 36,000 buses and coaches worldwide, would see Stagecoach shareholders owning 25% of the new company. This values Stagecoach at about £445m, representing an 18% premium on the closing price of the Perth-based company’s shares on Monday.
It follows difficult periods for both companies, following the pandemic, and clear savings can be made by combined head office functions, along with consolidation of operating areas, although it might prompt a competition investigation due to overlaps of some UK bus and coach operations.
National Express CEO, José Ignacio Garat, would become CEO of the new group, while Stagecoach chairman, Ray O’Toole, who was chief operating officer of National Express until 2010, would chair the business.
National Express, which runs bus and coach services across the UK, Spain, and the United States, saw revenues fall to £990m in the six months ending 30 June 2021, down from £1.03bn the previous year.
Stagecoach also saw sales fall in the year to 1 May, dropping to £928m from £1.4bn in 2020 due to the “adverse effect of the Covid-19 situation”.
Stagecoach’s founders, Sir Brian Souter and his sister Dame Ann Gloag, and their families still own about a quarter of the business, but started selling down their holdings in April.
Stagecoach – which runs Megabus intercity coaches – and National Express are both under pressure in the intercity market from German-based Flixbus, which in April 2021 said it aims to be the UK’s largest intercity coach operator.
Following changes to franchising, National Express exited UK rail in 2009, while Stagecoach operated the last its UK rail franchises in 2019. National Express employs 51,000 people worldwide, while Stagecoach employs 31,000 people.
Stagecoach runs 8,400 buses and coaches serving 1 billion passengers a year. It is UK-focused and operates mainly in Scotland, Greater Manchester, Sheffield and Greater London.
National Express has a bigger coach operation than Stagecoach and a worldwide fleet of 28,000 vehicles, operating across the UK and in Spain, and runs school buses in the USA. Stagecoach sold its North American division for £214m in 2018.
In an announcement to the Stock Exchange this morning, the talks were confirmed and the terms of the Potential Combination revealed. It is expected that Stagecoach shareholders would receive 0.36 new National Express ordinary shares for each Stagecoach ordinary share, resulting in them owning approximately 25 per cent. of the Combined Group.
Both companies stressed that the talks were still ongoing and that “there can be no certainty that an offer will be made”.
National Express has until 19 October to make a firm offer.
The Boards of National Express and Stagecoach believe that the Potential Combination would be a strategically compelling proposition with significant growth and cost synergies, as well as delivering strong value creation for both sets of shareholders.
Compelling Strategic and Financial Rationale
It is expected that the Potential Combination would provide an opportunity for the Combined Group to:
– Deliver significant operational efficiencies across the combined networks, with, for example, National Express Coach utilising Stagecoach’s well-located depot network to run and maintain its coach operations;
– Bring the ‘best of both’ from the combined operational capabilities of both businesses, whilst also delivering significant benefits to customers and passengers;
– Accelerate the expansion of National Express’ growth businesses, such as private hire coach, corporate shuttle and accessible transport, across Stagecoach’s UK footprint, as well as deliver other growth and revenue synergies; and
– Maintain strong relationships with key public sector stakeholders, best positioning the Combined Group in an evolving industry landscape, with quality public transport playing a critical role in delivering government priorities for cleaner, greener and more resilient economies.
Across National Express’ broader international portfolio, the Potential Combination would also yield increased scale and financial flexibility to facilitate continued investment in an attractive and diversified pipeline of high-return growth opportunities in North America and Spain-based ALSA.
In the Stock Market statement, National Express says: “Having reviewed and analysed the potential synergies of the Potential Combination, and having commenced discussions with Stagecoach management to refine this analysis, we are confident that the Combined Group can realise significant pre-tax cost synergies delivering attractive value for both sets of shareholders.
“National Express has, to date, identified pre-tax cost synergies that are expected to reach a run-rate of at least £35 million, with approximately 25% achieved by the end of the first year, 85% by the end of the second year and full run rate by the end of the third year following completion of the Potential Combination.The potential sources of quantified cost synergies include:
· Approximately 1/3 from network efficiencies and optimisation, including:
– Enabling National Express Coach to utilise Stagecoach’s well-located depot network with enhanced operational flexibility (such as removal of ‘double-manning’, ‘dead mileage’ and spare vehicle capacity) as well as for repair and maintenance.
· Approximately 1/3 from shared operational best practice across the combined UK bus network, including:
– Rolling-out industry-leading on-board technology systems (such as DriveCam), which National Express believes will maintain high safety, excellent reliability for customers and staff, and reduce insurance costs;
– Combined and enhanced scheduling, network and route planning to improve efficiencies and reduce overall mileage;
– Enhancing the technology offering across the Combined Group, including migration to ‘best-in-class’ apps to provide an optimised customer experience; and
– Additional adoption of operational best practices including best-in-class engineering, process improvement and other efficiencies.
· Approximately 1/3 from additional cost savings, including:
– Rationalisation of duplicate plc costs, back office and IT processes, digital savings and combined procurement; and
– The potential for non-depot property and office footprint rationalisation.
It is expected that the realisation of these identified synergies will require one-off costs of up to approximately £40m, broadly split equally across the first two years following completion of the Potential Combination.
In addition, National Express is confident of the Combined Group realising significant growth and revenue synergies, that cannot be quantified for reporting under the Code at this time, including:
· Accelerating the regional expansion of National Express’ growth businesses, such as private hire coach (NETS), corporate shuttle and accessible transport (NEAT), across Stagecoach’s UK footprint, as well as deliver a nationwide solution for rail emergency and routine rail replacement services; and
· Utilising the expanded UK bus footprint to optimise sales and marketing, including improvements in potential long-term available funding.
The announcement answers the question long asked by industry commentators about what Stagecoach’s long-term strategy. The group, under the leadership of its former CEO Brian Souter was once a large, innovative business, having operated in Europe, the USA, and rail markets. It also pioneered many technical and marketing innovations.
Since Brian Souter retired, under current CEO Martin Griffiths, the group has retrenched and is now largely a UK bus operator, whose once award-winning networks have suffered decline and become lacklustre.
National Express, meanwhile in recent years has become aquitistive adding a number of respected UK coach operators to its network and investing heavily in its UK bus and coach businesses,