Government could take over Stagecoach's East Coast franchise

Stagecoach was under the cosh as the transport minister said late on Monday that the government could take over the company’s running of the rail route between London and Edinburgh after it got its numbers wrong when bidding for the franchise.

Transport Secretary Chris Grayling said that Stagecoach, which has breached a key financial covenant, would continue to run the route only for "a small number of months and no more”, with the contract set to end earlier than expected.

In a statement in the Commons, Grayling said: “I have already informed the House that the franchise will in due course run out of money and will not last until 2020 but it has now been confirmed that the situation is much more urgent.”

Grayling put two options on the table. The first was that Stagecoach could continue to operate services on the East Coast under a very strictly designed short-term arrangement and a not-for-profit basis. The second would be for the East Coast franchise to be directly operated by the Department for Transport through an operator of last resort.

Grayling insisted that a bailout was not an option for Stagecoach, which owns 90% of the East Coast joint venture with Virgin, adding that the transport company will be held to all of its contractual obligations in full.

In a statement late on Monday, Stagecoach chief executive Martin Griffiths said: “Contrary to much misinformed recent comment, we have neither walked away from the East Coast franchise nor asked for, or received, any special treatment. We have accepted our share of risk agreed with the government at the time the franchise was let.

“At all times, we have acted with professionalism and integrity by fulfilling Stagecoach's obligations to fund the franchise, even in challenging times and with changed circumstances. We are also continuing our discussions with the Department for Transport about new contractual arrangements to facilitate the transition to the planned new East Coast Partnership in 2020.”

The company also said that the outcome of the ongoing discussions between Virgin Trains East Coast and the DfT might result in further cash and non-cash exposures in its consolidated financial statements in addition to those already accounted for. This could result in Stagecoach's consolidated non-rail net debt being up to around £19m higher than previously forecast.

Mike van Dulken, head of research at Accendo Markets, said: "This would be a repeat of the 2009 debacle, when the government (under Transport Secretary Adonis) seized control from National Express for six years, and would mark an ever earlier end to 2015’s £3.3bn eight year failed re-privatisation attempt, which the government was already set to terminate three years early (2020) after the franchise clearly overbid for a route suffering from uneconomical passenger numbers.

"Following the collapse of Carillion and subsequent Capita profits warning this latest episode will only add to bad press about a rotten government outsourcing process including claims of preferential treatment, ignoring of profits warnings and politically unpalatable bailouts. It will also work the other way too though, fuelling criticism of the private sector’s apparent inability (or at least significant difficulty) in tendering for and successfully running public services without a Whitehall backstop. One that is having to be used rather too often for the taxpayer’s liking."

CMC Markets analyst David Madden said: "Like with many companies bidding for government contracts, Stagecoach were too competitive in their proposal and now it has come back to bite them. The share price has been in decline since 2015, and if the negative move continues it could target 115p."

At 1115 GMT, the shares were down 6.7% to 135.60p.