OPERATING buses may not sound the most glamorous of businesses but the
industry is one of the busiest around when it comes to mergers and
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Now Aberdeen-based GRT, which also runs buses in central Scotland, is
set for a #265m merger with Badgerline, whose stronghold is southern
England. The merger would create the second-largest bus company behind
market leader Stagecoach. The combined bus fleet will number 5600.
For once there is no threat to jobs in the get-together. GRT employs
3700 and Badgerline 10,700 and Moir Lockhead, chairman of GRT,
categorically ruled out any compulsory redundancies, though some jobs
would go through natural wastage. Rather, he said, the merger would
improve job security as employees would become part of a stronger group.
Both companies are at pains to emphasise that it is a genuine merger
of two free parties, not a takeover. It will be effected through a
scheme of arrangement whereby shareholders will receive shares in a new
GRT holders will receive 1.9023 FirstBus shares for every GRT share
and for Badgerline it will be a straight one-for-one swap. GRT holders
will end up with 36.4% of the merged group and Badgerline 63.6%, the
proportions being in line with their companies' relative
Mr Lockhead will be chief executive of FirstBus and Trevor Smallwood,
the Badgerline chairman, will be executive chairman. The group will
continue to operate in a decentralised manner as it is believed only
local managers know their particular market. The present operating names
will be retained. They include Lowland, Mairs, Kirkpatrick, and Midland
GRT will bring its employee involvement into the combined group. It
has an employee director, Bob Barclay, who will have the same role in
FirstBus. There will also be a employee share option scheme (ESOP)
absorbing 5% of profits, in line with GRT's present scheme.
Badgerline includes PMT and Rider in the north of England but its main
strengths are in southern England. It may seem strange that two
companies operating at each end of Britain should be joining forces,
particularly given that the chairman will be based in Bristol and the
chief executive in Aberdeen.
But both companies insist they will derive significant economies of
scale from joint purchasing. Together they are spending #40m a year on
new buses plus #55m on fuel and spares. Then there will be savings in
having a single stock market listing and in avoiding duplication in
management offices. Another advantage of the merger will be to improve
geographical spread, reducing the risk of being caught out by varying
GRT has one of the highest operating efficiencies in the industry
because, as Mr Lockhead explained, they focused early on getting costs
under control following privatisation. Its system of ensuring each
operating company reaches a benchmark of performance has helped raise
margins to 14.7% and this system will be applied to Badgerline, whose
margins are lower at 10.1%.
The aim is to raise FirstBus margins to the higher level over three to
five years. For its part, Badgerline has particular exertise in
group-level trend analysis techniques to monitor costs and efficiency.
Its fleet is also slightly younger at an average of under nine years
against 10 for GRT.
Financially GRT's cash position is better, while Badgerline is
stronger in net assets because as it has spent more on new vehicles. The
bus industry is usually highly geared as it has to spend constantly on
new buses and acquisitions have meant goodwill being written off.
FirstBus will start at 210% but this is expected to fall rapidly to 150%
and interest cover is 4.5.
GRT's operations include networks in Leicester, Northampton, Norwich
and Ipswich and there is only a single slight overlap with Badgerline in
Ipswich. So no problems with the Office of Fair Trading are expected.
Mr Smallwood and Mr Lockhead have known each other through their
industry association for some and the impetus for the merger derived
from this and the two have been talking since before Christmas.
While there are some clear economies of scale it is hard to see these
are overwhelming and likely to make a significant improvement in
customer service. It is possible GRT found itself vulnerable in its
position as seventh in the industry league table with a 3.7% market
Now GRT has indicated its willingness to join forces with another
company it is possible it could attract a predator. But it is already
highly rated in the sector and any bid would have to be agreed because
half the shares are in the hands of directors, managers and employees.
The price of agreement would inevitably be very high. Size is probably
sufficient protection against a bid for Badgerline.
Directors and senior executives hold 30% of GRT, while employees and
the ESOP hold 20%. Shares in the ESOP are divided equally between all
staff who have been with the group for more than six months.
Another uncertainty in the merger is how the chairman and chief
executive will divide their responsibilities, given that each has been
heading their own company up to the present. Any friction will undermine
the advantages of merging.
Once the merger is completed, FirstBus will in its turn be on the
lookout for further acquisitions. Despite the activity in the industry
35% of the market remains outside the major companies. FirstBus has an
advantage in that GRT was originally a buyout of a municipal-owned
business while Badgerline was part of the National Bus Company.
So it has experience of both forms of previous ownership. Opportunites
are getting fewer, particularly given the possible monopoly problems,
though it is an industry with a low cost of entry for a small local
Apart from acquisitions, FirstBus will consider diversification into
rail. Both GRT and Badgerline have pre-qualified to be
franchise-holders. Overseas opportunities are also being evaluated.
Both companies are growing fast, with Badgerline's 1994 profits up
142% at #16.7m, though underlying earnings per share were a more modest
12.5% ahead. GRT is estimating profits for the year ending last month up
82% at #8m, with earnings per share were 36% ahead. It intends to pay a
final dividend of 3p making a total of 4.4p. FirstBus would have paid
4.5p had it been in existence for 1994/95.
FirstBus has set itself the target of being the strongest operator in
the industry, providing high quality services at prices customers can
afford. These are laudable aims but while concentration in the industry
may benefit shareholders, it remains to be seen whether it will really
be to the advantage of consumers.