The National Express (LSE: NEX) share price shot up by 7%, from 223p to 240p, by market close yesterday. I’ve argued in the past that the travel stock is a strong recovery play. And I think that if all goes well, its share price could soon recover to the giddy heights of 476p it commanded in December 2019.
The FTSE 250 coach operator has just entered talks with Stagecoach (LSE: SGC) about a possible merger. The talks also sent the Stagecoach share price 27% higher to 86p. So is now the right time for me to buy National Express shares?
National Express has proposed that every Stagecoach share be converted to 0.36 National Express shares. This explains why the Stagecoach share price rose so rapidly; even though it’s the largest bus operator in the UK, it’s simply come up to the level of the proposed deal. The end result would be National Express owning 75% of the new group and Stagecoach the remaining 25%.
While travel stocks have been in the doldrums recently, there’s been a slew of positive news. High vaccination rates across the US, UK, and Europe seem to be keeping the delta variant at bay for now. And transatlantic flights will soon be resuming. For National Express, the staycation boom could be good news if more people continue to holiday at home over the next few years.
National Express revenues fell from £1.03bn in H1 2020 to £990m in H1 2021. Meanwhile, Stagecoach also saw revenue fall this year, dropping from £1.4bn to £928m. So a consolidation of the two businesses to cut costs makes a lot of sense to me.
The companies believe that the merger will provide “significant operational efficiencies across the combined network.” To start with, the merged company will reduce its office space, and potentially lay off staff with identical roles. It’ll also be able to combine bus and coach schedules where they duplicate.
National Express believes the deal would bring the “best of both” worlds to help grow the combined company. It would be able to use Stagecoach’s larger depot network to expand its routes. It also believes the merger will allow it to grow more quickly by developing its private hire coach, accessible transport, and corporate shuttle businesses. And the new group will have more buying power when purchasing new vehicles.
The two companies also said the merger would put them in a better position to “maintain strong relationships with key public sector stakeholders.” And between the two they would eventually see savings of at least £35m a year.
The risks for the National Express share price
Both companies have insisted that “there can be no certainty that an offer will be made.” The deal would also see one-off costs of around £40m in the first two years. Therefore, it would be some time before the cost savings outweigh the initial expense of completing the merger.
And I think home and flexi-working could be here for the long run. Long term, travel companies could be making less money from commuters than in previous years. I still think National Express is a good recovery play, though. And if it does complete the merger with Stagecoach, the share price could soar as travel rebounds.
Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.