By Scott Wright

FIRSTGROUP has thrown out a takeover approach that valued the bus and rail giant at up to £1.23 billion, declaring that its board had “unanimously rejected” the proposal.

The Aberdeen-based company, which owns First Bus and runs the West Coast rail franchise, had been considering the latest in a series of “unsolicited, conditional proposals” from private equity firm I Squared Capital. The latest approach was received on May 25.

I Squared Capital came to prominence last year when it joined forces with fellow private equity company TDR Capital to acquire Glasgow-based Aggreko for £2.3 billion.

Its latest approach for FirstGroup comprised a cash component 118p per share and a contingent right to up to a further 45.6p per share. The contingent right was based on the outcome of the earn-out that can be achieved by FirstGroup from the sale of First Transit, and the net proceeds realised from Greyhound legacy assets and liabilities.

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FirstGroup offloaded the US-based First Transit and Greyhound last year.

The company told the City: “The board, having carefully evaluated the proposal together with its advisers, concluded that the cash component of 118 pence per FirstGroup share significantly undervalues FirstGroup’s continuing operations and its future prospects, and the contingent right to up to 45.6 pence per FirstGroup share does not provide shareholders with sufficient certainty.

“Accordingly, the board has unanimously rejected the proposal.”

Russ Mould at stockbroker AJ Bell suggested there was too much uncertainty in the approach to make it compelling to shareholders. He said: “FirstGroup continues to block I Square Capital from getting on board, having now rejected the latest takeover bid. The idea that its offer is split into two is not attractive for shareholders as there is uncertainty over how much they would get, given one component is dependent on the outcome of various factors. Furthermore, FirstGroup doesn’t think the main cash component is generous enough.

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“Increasingly we’re seeing takeovers given the thumbs down unless the offer is all in cash and is pitched at a decent premium to the market price, to reflect the future potential of the business as well as the current state.”

The approach for FirstGroup followed its exit from the US market after a 15-year spell. The company had first moved into the US with the acquisition of transport conglomerate Laidlaw, a deal that saw it take over the Greyhound, First Transit and First Student businesses across the Atlantic.

First Transit and First Student were sold to EQT Infrastructure, a private equity group, for $4.6bn (£3.3bn) in April last year. FirstGroup then sold Greyhound to FlixMobility, a European bus and rail company, for $172m (£125m) in October.

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Susannah Streeter at stockbroker Hargreaves Lansdown said: “The resounding ‘no’ didn’t come as too much of a surprise, given that some of First Group’s larger shareholders had already signalled they thought the offer fell well short of the company’s value. There was particular concern raised about the offer being conditional on proceeds from agreed asset sales.

“It’s unlikely that PE (private equity) interest in First Group has completely hit the end of the track, given that UK assets look cheaper because of the weaker pound. There certainly is still potential that I Squared could come back with a higher offer, but it would have to be substantially approved before it would be given the green light.’’

FirstGroup shares closed down 1.7p, or 1.2%, at 135p.

Mr Mould added: “Takeovers often involve putting a starting number on the table and testing the water to see how it goes down. Any rejection can quickly be followed by a higher bid if the suitor really wants the target business.

“FirstGroup’s latest rejection implies that it would only seriously consider an offer if it provided more certainly to shareholders and wasn’t contingent on any factors, as well as being a bit higher than the current one on the table.

“I Squared will have to dig deeper into its pockets if it wants to win FirstGroup and it will have to structure its deal in a different way. If it is serious about owning the business, that means an all-cash deal with no contingencies and one that better values the company’s current and future potential.”