Shares in bus and train operator FirstGroup (LSE: FGP) share price rose sharply on Friday morning, after the company announced a £3.3bn deal to sell its remaining US businesses. The gains mean that FirstGroup’s share price has now risen by around 50% over the last 12 months.
The deal appears to solve several problems for FirstGroup, leaving it in a strong position to benefit from a return to normal trading in the UK. Should I consider buying the shares as a reopening trade? I’ve been taking a look at today’s news.
What’s the deal?
FirstGroup has agreed to sell its First Student and First Transit businesses to Swedish investment group EQT Infrastructure for £3.3bn.
First Student is the largest school bus service operator in the US, while First Transit operates bus services in North America, carrying more than 350m passengers each year.
Although FirstGroup is best known in the UK for its bus and rail services, the firm’s US businesses have historically generated about 70% of group profits.
The only remaining US business is the Greyhound long-distance bus operator. This is also up for sale. Although Greyhound is an iconic brand, the business has struggled in recent years and reported an £11m loss in 2019/20.
FirstGroup is exiting the US market and plans to focus only on the UK. As a potential shareholder, this means that I need to be aware of the changing profile of the business.
How the numbers add up
£3.3bn is clearly a lot of money, given that FirstGroup’s market cap is currently just £1.1bn.
Based on FirstGroup’s results for the 12 months to 31 March 2020, EQT is paying nearly 18 times operating profit for the businesses being sold. However, little of this money will go to shareholders. The main reason for this is also the reason for FirstGroup’s historically low share price — it has a lot of debt.
After deducting various items such as insurance liabilities, FirstGroup expects to receive £2.19bn from EQT. Of this, £1.345bn will be used to repay debt and £336m will be paid into FirstGroup’s UK pension schemes.
Shareholders are next in line and will receive £365m, or 30p per share. The company says that there may be “potential for further distributions” to shareholders “in due course”.
FirstGroup share price: what will happen next?
Should I buy shares in the UK-only firm? Management said today that adjusted profits for the year to 31 March are expected to be ahead of expectations. That sounds positive, but I think it’s worth remembering that this wasn’t a normal year.
FirstGroup’s UK bus and rail businesses have been receiving bailout payments from the government since April last year. I don’t think profits generated last year have much meaning — how will the company perform when life returns to normal?
My view on this business is mixed. Although I think bus services should be a reliable source of profit in normal times, I’m less keen on UK rail.
First Rail’s profit margins are low — 2.2% before the pandemic — and the franchising system is widely seen as problematic. I think changes are likely in the next few years. These might take away another chunk of its business.
On balance, I’m not tempted by FirstGroup’s share price. I won’t be buying today, but I will keep an eye on how the UK business develops after the pandemic.
