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Link-up creates second-largest bus group. GRT and Badgerline in agreed #265m merger

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 acquisitions.

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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 company, FirstBus.

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 capitalisations.

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 Bluebird.

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 economic conditions.

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 share.

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 operator.

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.

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