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Railhub Archive
2000-04-03 STG-001
Stagecoach Group


Stagecoach to dispose of Porterbrook for £1.4 billion

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Stagecoach Group

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Stagecoach Group

Stagecoach to dispose of Porterbrook for £1.4 billion

3 April 2000
source Stagecoach Group
type Press release

Disposal of Porterbrook to Abbey National plc

o Net proceeds of £773 million
o Proposed share buy back of £250 million

Trading Update

o Current year's results satisfactory
o Cost pressures in the UK and US bus businesses are likely to impact on Group performance in the next financial year.

Stagecoach Group Chief Executive Keith Cochrane said: "Porterbrook has provided strong returns for Stagecoach in the four years since its acquisition. Porterbrook will now require significant additional capital to develop further and by disposing of the business now we are maximising value for our shareholders."

Stagecoach to dispose of Porterbrook for £1.4 billion
The Board today announces Stagecoach has conditionally agreed to dispose of its Porterbrook business to Abbey National and will receive cash proceeds of £773 million including repayment of £478 million of internal group debt. Abbey National will also assume £669 million of external debt and train purchase commitments, giving a total business valuation of £1,442 million. The disposal is subject to the approval of Stagecoach shareholders.

The Stagecoach Group acquired the Porterbrook business for £830 million including the assumption of debt on 28 August 1996. Porterbrook supplies rolling stock in the UK to train operating companies and, to a lesser extent, to freight operators under operating leases, and procures heavy maintenance on the rolling stock. For the year ended 30 April 1999, Porterbrook had turnover of £269.5 million (1998: £269.0 million) and pre-tax profit of £109.5 million (1998: £100.2 million).

Background to the Disposal
Stagecoach 's purchase of Porterbrook has been an outstanding success. Since its acquisition in 1996, Porterbrook's profits have grown strongly and it has secured new train orders totalling over £500 million. The outlook for the Porterbrook group in a growing UK rail market remains good but the rolling stock market has reached a watershed. The prospect of passenger rail franchises being renewed for longer periods and the expected heavy commitment to invest in new rolling stock presents a substantial opportunity for Porterbrook and the other rolling stock companies. However, to be successful in this marketplace will require access to very large amounts of competitively priced funding.

To date, the Porterbrook group has financed new rolling stock orders principally through a combination of the use of securitised debt and internal free cashflows generated by Porterbrook. Looking forward the Board has concluded that these funding sources will be insufficient to sustain and grow its market position and maintain the absolute profitability of Porterbrook, particularly since the benefit of UK government rental guarantees will cease over the next 4 years. The Board believes it would not be in the interests of Stagecoach Shareholders for additional Group resources to be injected into Porterbrook, since this could inhibit the development of Stagecoach 's other commercial operations, on which greater returns can be achieved. As is the case with the current ownership of the other two rolling stock companies, future funding can more appropriately be provided by a major financial institution, such as Abbey National, which has significantly greater access to the long term capital markets.

The Board anticipates that the proposed disposal will yield a gain of approximately £391 million before a write off of goodwill of £276 million. Whilst the disposal of the Porterbrook group will initially be significantly earnings dilutive for Stagecoach Shareholders, in light of the above, the Board believes that a disposal of the Porterbrook group at this time provides greater financial flexibility to support future growth and is in the best long-term interest of the shareholders.

Principal terms and conditions of the Disposal
Under the Disposal Agreement, Stagecoach has conditionally agreed to sell, and Abbey National has agreed to purchase the entire issued share capital of Stagecoach Porterbrook. The amount to be received for the sale will be £773 million (including the repayment of inter-company indebtedness) in cash payable on completion. Abbey National will acquire the Porterbrook Group with its existing net external debt and capital commitments under rolling stock purchase arrangements.

Use of Disposal proceeds
Stagecoach will receive net proceeds of £773 million at completion of the Disposal. The Board is committed to ensuring that shareholder value is maximised through the use of these proceeds and therefore will continue to seek to identify value adding acquisition opportunities, the funding of which is consistent with the long term capital requirements of the business. Stagecoach has become one of the leading companies in the transport sector since its incorporation approximately 20 years ago, growing largely by acquisition, and during this period it has completed over 27 major acquisitions in the UK and other overseas markets.

Subject to there being no significant investment alternatives to enhance shareholder value, the board intends to take suitable opportunities to buy back up to £250m of capital through the next financial year. If value adding acquisition opportunities are not forthcoming it would be the Board's intention to return further capital to shareholders. The Board recognises that it is important that the company retains flexibility in the manner and timing of any return of capital in order to maximise benefit to Stagecoach Shareholders.

Initially, however, the proceeds from the Disposal will be used to reduce net borrowings.

Current trading and prospects of the Stagecoach Group (excluding any members of the Porterbrook Group).
Overall the Stagecoach Group continues to trade satisfactorily and there have been particular successes from the early restructuring of our Hong Kong and New Zealand businesses and from good passenger growth in our UK rail franchises. At Coach USA there has been continuing revenue growth but this has not compensated for the increase in fuel prices and tightness in the labour market. Facing similar labour market pressures and flat volume growth, the UK bus business is expected to contribute around the same level of profit as last year.

The unexpected withdrawal from Prestwick of its principal freight customer, Federal Express, will materially affect the airport's profitability. The Board therefore roposes to write down the value of its investment by £30 million in the current year to reflect the potential impairment.

Looking ahead the Board will continue to identify acquisition opportunities which enhance shareholder value.

In the UK the Board recognises that it has to contend with a higher cost base in both the bus and rail businesses and the declining annual subsidy at South West Trains. Management focus will therefore be on initiatives to increase revenues, the benefits of which will be material but will not necessarily accrue in the year to 30 April 2001.

Similarly the Board anticipates that Coach USA will continue to feel the effects of a higher cost base next year but the benefits of the integration plan that is being carried out across the whole of the business will provide a strong platform for growth in the medium term.

The disposal is subject to shareholder approval. A circular, containing details of the transaction and notice of an Extraordinary General Meeting will be posted to shareholders in due course. Ann Gloag and Brian Souter have irrevocably undertaken to vote in favour of the Disposal in respect of their own beneficial and non-beneficial Group, representing approximately 20.3 per cent of the issued ordinary share capital of Stagecoach.

Railhub Archive ::: 2000-04-03 STG-001


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