FirstGroup rejects 'opportunistic' offer from Apollo Management

FirstGroup said late on Wednesday that it had received a "preliminary" and "highly conditional" indicative proposal from private equity firm Apollo Management, but that this was unanimously rejected.

"The board of FirstGroup has considered the proposal in detail and believes that it fundamentally undervalues the company and is opportunistic in nature," it said in a statement issued following a spike in the share price.

The transport operator said there can be no certainty that any firm offer will be made nor as to the terms on which any firm offer might be made and that a further announcement will be made in due course if and when appropriate.

RBC Capital Markets said that if Apollo chooses to walk away, there are presently no other confirmed or reported offers and the risk is the shares could sink back below 90p pre-bid as there remain value risks in the company and fundamental questions over its inability to deliver on what is left of its last strategy.

"For the company to justify a higher share price on stand-alone basis, strategy and delivery thereon needs to improve (versus track record), in our view. For example, we find investors perplexed why FirstGroup has been embarking on debt refinancing without any guide of an updated strategy of what it wants to be. We find investors surprised that a deep re-think of its raison d'etre has not been used to guide the type and mix of capital structure it needs."

RBC said that while Apollo’s bid price is not known, a sufficient control premium, a competing break-up bid, or a self-breakup could see the company struggle to remain independent in its present form given the standalone equity track record.

Meanwhile, CMC Markets analyst David Madden said: "Profit warnings have been commonplace at the rail and bus operator in recent years and it seems that Apollo is trying to swoop in when the company is vulnerable. The approach should motivate the board of FirstGroup to turn the business around."

Jefferies said there are some key challenges such an approach would need to overcome: the debt in the business (net debt last reported at £1.6bn excl restricted rail cash) and its long-term structure - a challenge if interest involves splitting up the group; a £338m pension deficit and two new rail franchises that were won on full terms and are only at their outset.

"Expect shareholder interest to hear more. After years of management struggling to turn around this group - expect shareholders to be interested to see the proposed terms flushed out, not least because of their reported cash nature. But our first view is that any approach won’t be straightforward for the acquirer. Perhaps that all explains the 'highly conditional' nature of the interest."

Meanwhile, Liberum said: We have long considered FirstGroup to be undervalued as recent poor performance has caused the market to overlook its leading or near-leading positions in all of its main markets. A takeover of the group would be far from straightforward, with UK government approval required for change of control of rail franchises and pension deficits to navigate around.

"Nonetheless, the approach ought to act as a catalyst for more urgent action by the board to crystallise value and/or for more credit for the potential value of the group being reflected in the share price."

At 1340 BST, the shares were up 3% to 104.80p.