THE acquisitive Stagecoach, which already owns the largest of Britain's passenger rail franchises, yesterday announced its proposed acquisition of one of the three companies which lease the rolling stock, Porterbrook.
In one fell swoop, what is by far the bus and train group's biggest purchase would make it the owner of about one-third of the UK's passenger trains.
The bold move promises to be a political hot potato for President of the Board of Trade Ian Lang, who will have to decide whether the competition issues thrown up warrant a reference to the Monopolies and Mergers Commission (MMC).
If the deal is waved through by the competition authority, it will mean one Stagecoach subsidiary leasing rolling stock to another.
The proposed acquisition, which was greeted with delight in the City, sent shares in Perth-based Stagecoach rocketing 60!sp to 542!sp.
In the seven months since it was privatised, the price of Derby-based Porterbrook has leapt by about #300m. It was sold off by the Government with no debt for #527m in January - with its 49-strong management and employee team taking a 20% equity stake and venture capitalists led by Charterhouse Development Capital taking 80%.
It is effectively now costing #826m to buy almost the same assets - with Stagecoach paying #476m for the equity and assuming #350m of debt.
Explaining the massive rise in price, a Stagecoach official said the rail industry had changed quite significantly in the last seven months.
He added: ``When these businesses were originally marketed, the political environment was extremely uncertain about rail privatisation. The Labour Party had done a good job in putting a lot of people in the City off.''
The windfall gain made by Sandy Anderson, the Porterbrook chief executive who has been invited on to Stagecoach's board, was not disclosed but looks certain to have been substantial.
Stagecoach, which took over the massive South West Trains franchise at the beginning of February, has in effect been talking to Porterbrook ever since.
It failed in a bid for one of the other rolling stock companies, Angel Train Contracts, when it was privatised.
Stagecoach will pay out #277m in cash and loan notes for Porterbrook, financing the remainder of the consideration through the issue of 43.75 million shares. The company also plans to raise about #111m from a one-for-six rights issue, at a discounted 410p-a-share.
Taken together, the new shares being issued will account for about 30% of Stagecoach's enlarged share capital.
Stagecoach said the acquisition of Porterbrook, which made pre-tax profits of #86m on turnover of #263m in the year to end-March, would result in ``immediate and substantial'' earnings enhancement.
The rolling stock company leases to 16 of the UK's 25 train operating companies and exclusively to four of them.
Porterbrook owns 3774 rolling stock ``units'' or carriages. Four-fifths of the #1660m of lease income it will receive over the next seven years is guaranteed by the Government.
Stagecoach attempted to demonstrate its ``commitment to invest in new trains'' by announcing that, when the offer became unconditional, it intended to place a #90m order for 30 through Porterbrook. These would be delivered to South West Trains in 1998.
Brian Souter, executive chairman of Stagecoach, said: ``Porterbrook's innovative management have practical plans to enable significant rolling stock investment. These will improve services to passengers and meet the demands of a modern rail infrastructure.''
In a bid to circumvent an MMC reference, Stagecoach took the unusual step of offering detailed undertakings.
It has promised, among other things, to ensure Porterbrook offers rolling stock to other private sector train operators on the same terms as those offered to its own passenger rail companies.
It has also undertaken, where possible, that Porterbrook will not supply it with commercial information about rival operators obtained in its dealings with them.
Stagecoach's only passenger franchise victory to date has been South West Trains, which operates out of London's Waterloo Station. The group is on the shortlists for the major South Eastern Train Company in Kent and the smaller Cardiff Railway Company.
When it announced a 34% rise in annual pre-tax profits last week to #43.6m, it reiterated its intention to bid for the 12 franchises still to go out to tender.
Mr Souter and Stagecoach director Ann Gloag, the brother and sister team which founded the company with two buses in 1980, intend to take up some of their rights to additional shares by subscribing #10m between them.
The Stagecoach official said the family's 39% stake, valued at some #353m last night, will be diluted to about 28% when the new shares are issued.
The Office of Fair Trading said it would be looking at the proposed acquisition in the normal way.
Rail regulator John Swift, one of those who will advise the Director General of Fair Trading, said the proposed merger raised a number of important public interest issues.
He will be examining the likely effect on investment in new rolling stock and on future competition in both the market for rolling stock and the provision of passenger services.
Mr Swift yesterday published a consultation document seeking the views of interested parties on the regulatory issues.
The Office of Passenger Rail Franchising (Opraf), the body charged with privatising the train operating companies, said certain matters would have to be addressed before it permitted Stagecoach to bid for further franchises.
It added that it would want to review Stagecoach's existing bids for more passenger rail networks.
Opraf said, in forming its view, its main concern would be to protect the integrity of the franchise-bidding process, the operation of rail franchises, and the long-term development of the railways.
It highlighted the importance of franchisees and bidders not being discriminated against in their dealings with Porterbrook and of such dealings being conducted in a ``reasonable and transparent'' manner.
Opraf welcomed Stagecoach's undertakings but said it would have to examine them in more detail to ensure they established a framework of ``clear, effective safeguards'' to ensure the integrity of the bidding process and the ongoing relationship between Porterbrook and the train operating companies.
In an innovative deal to finance the purchase, Union Bank of Switzerland will provide a #550m bridging loan to Stagecoach, which should ultimately be replaced by a #535m ``debt securitisation'' arrangement.
This will be secured against Porterbrook's lease income and thus ring-fenced from Stagecoach.
According to analysts, though gearing would temporarily rise to about 300%, it would then come back down to about 100% because of the deal struck with UBS.
This is the first debt structure of this type to be used in a deal of this kind in the UK, where equity has also been involved.
Only last week, Stagecoach announced it was preferred bidder for Swebus, Scandinavia's largest bus company. The purchase price is expected to be between #110m and #120m.