FirstGroup admits error after asking for £240m

TIM SHARP

Published on 15 May 2008

Moir Lockhead, chief executive of FirstGroup, admitted yesterday as he asked shareholders for £240m that the Aberdeen-based transport company should have sought new funds when it took over Laidlaw in the US last autumn.

While FirstGroup is adamant that its major shareholders backed the £240m plan, its shares closed down 37.5p, a 6.26% drop, to close at 561.5p .

FirstGroup, which raised £200m when its £1.9bn takeover of bus firm Laidlaw International was announced last February, had originally intended to raise another £175m after the acquisition was completed in October.

Lockhead said yesterday: "Last October when we took over Laidlaw we talked about raising £175m. We chose not to because we thought maybe we didn't need to but the market changed since then."

Asked if in retrospect he should have sought the cash last autumn when equity markets were higher, he replied "I wouldn't argue with that."

But he added: "In October shareholders might have said hold on, we are not sure you need that'. Now they are saying you are being very sensible'."

He said that strengthening the company's balance sheet would give it the flexibility to continue its growth plans as it eyes up further small acquisitions in the disparate North American market.

FirstGroup is keen to pick up more business in the school bus market or shuttle buses for airports and college campuses. It has already bought up two small US firms since concluding the Laidlaw deal.

"It is the right time to do (the fundraising) now on the back of good results and strong cash flows," Lockhead added, indicating he was certain the company would get the money. "I have met our largest shareholders and the response is good. It is covered, it is done. We do not know how oversubscribed it is, but it is done."

The share placing should cut the company's debt from £2.16bn to around £1.93bn, although much of this will need to be renegotiated by 2010.

The company is confident that its cash flow, which increased to £470.8m last year from £367.9m, will increase markedly next year, allowing it to pay much of it down.

FirstGroup's financial results for the year to March 31, which were announced yesterday, showed it made an adjusted pre-tax profit of £249m last year, up 27% on the year before. Operating profits reached £360.1m, a jump of 39% on a year earlier.

Revenues for its UK bus division, which were up 2.8% with margin up 1.4% to 11%, and North America, where profits were up 105% after Laidlaw was integrated into the business in October, were slightly ahead of analysts' expectations.

Rail came in slightly below some forecasts, although revenues were up 6.2% and operating profit rose 10.3%. The company was recently awarded a three-year extension to its First ScotRail franchise to take it to 2014. But Lockhead admitted yesterday the company had been close to losing its First Great Western franchise, which runs from the west of England into London Paddington, after a series of customer complaints about conditions when it started refitting its trains.

Lockhead said: "We are ahead of the plan. We underestimated the performance and having seen what was happening, and having put that right I am hopeful we will see a recognition of that in the coming months."