Analysts warn debt restructuring remains key to future of Aberdeen company
By John Phelps

Transport sector analysts are poised for an announcement this week on the future of FirstGroup's iconic Greyhound buses operation as chief executive Moir Lockhead prepares to check in with the Aberdeen-based company's first set of annual results since last year's £1.7 billion acquisition of the Laidlaw group.

Expectations are high that the North American acquisition will lead to a surge in profits from £196 million to as much as £250m for the year to the end of last March - and a further increase to around £310m in the current period - but analysts believe the chief executive now needs to make disposals or restructure its debts to boost its balance sheet.

FirstGroup negotiated a $2.25 billion (£1.13bn) term loan to finance the Laidlaw deal, which was completed last October and has an additional £520m revolving credit facility.

These two loans have to be replaced when they expire in February and March 2010 respectively, and debt watchers at Fitch Ratings recently assigned a negative outlook to FirstGroup's BBB credit rating ahead of any action by directors.

"The group still has some time on its hands and enjoys excellent cashflow, but I would expect Moir to address the uncertainties as a matter or urgency," commented one leading analyst. "He has made a thorough review of Greyhound since its acquisition and is likely to announce a string of measures to improve its efficiency and generate new business.

"I believe he would like to hold on to see the full benefits, but time may not be on his side and I would expect to see a disposal in a matter of months."

Brokers at Morgan Stanley have placed a valuation of some £421m on Greyhound as it stands, and enthusiasts believe that it is beginning to see a mini-revival as students, in particular, make more use of public transport as a result of rising car costs.

But others question the value of Greyhound's near 1000-strong chain of depots, which are often in rundown city centres, and believe FirstGroup may be planning closures and sales to move further out to the suburbs.

The group recently introduced a new service, based on kerbside pick-ups, for those who steer clear of its depots, and is expected to claim to be winning new business - though one writer for a southern Illinois newspaper found himself the only passenger on a 50-seat bus travelling the 100 miles from New York to Philadelphia.

A further boost to the business could come with a move away from Greyhound's traditional paper tickets, paid for on the buses through an expensive agency network, towards internet sales and bar-coded vouchers.

FirstGroup originally bought Laidlaw for its fleet of approaching 40,000 school buses, and Greyhound has been seen as peripheral to the business.

Directors are expected to announce that the core schools business has beaten their expectations after scoring contract gains in the autumn negotiating season.

Followers also believe that they have now identified more than £100m potential cost savings, rather than their original target of £70m, after finding more duplications with the group's original school buses business.

Brokers at Credit Suisse say that North American operations lifted their total contribution to operating profits from £68m to around £141m last year, even though Laidlaw had been part of the group for only six months. They look for a sharp upsurge to £251m or so in 2008-09, when Laidlaw will account for more than half of all group profits.

But directors will stress that the UK operations are also making the most of the revival in public transport at a time of soaring petrol prices.

Bumper business at the recently extended ScotRail more than compensated for the dismal showing of the group's Great Western operations, where FirstGroup held onto the franchise only after agreeing £29m improvements, so that total revenues surged by 10% after a 6.5% jump in passenger numbers.

The group is also expected to ann-ounce further progress towards 12% profit margins on bus fares as increasing passenger numbers (and charges) cancelled out the effects of higher fuel charges.

Meanwhile, it is anticipated that the group will use this week's results presentation to stress its commitment to Aberdeen at a time when a growing list of multinationals are threatening to quit the UK over Chancellor Alistair Darling's plans to increase tax on overseas earnings.

"We are investing heavily in our new global headquarters in the city and are moving all major functions there," commented a spokesman. "We are not thinking about moving and have no plans to do so."

However, he conceded: "Obviously we will be monitoring the effects of any changes in current legislation."

Other major companies to disclose plans to move domicile overseas as a result of the proposed tax changes include media groups WPP, United Business & Media and drugs group Shire, while those who have made threatening sounds include GlaxoSmithKline, AstraZeneca, Diageo and ITV.

The chorus of protest has led many to believe that the government could be forced into another U-turn when the Treasury issues a consultation paper on its tax proposals later in the summer.