National Express (LSE: NEX) may not have had a year to write home about, but it sure is the talk of the town today. The FTSE 250 coach services provider is in discussion with Stagecoach, another transport operator, about a merger between the two companies.
What does the deal entail?
According to the proposed agreement, investors in Stagecoach would receive 0.36 of National Express shares for each share held. The companies believe that their coming together offers “significant growth and cost synergies”. Both companies’ shares have rallied on the news, which comes in after a very challenging period for the travel sector. Stagecoach shares have seen bigger gains, rising by 21% from yesterday. The National Express share price has risen less, but by a still notable 7.7% as I write.
National Express’s improving health
I have long been bullish on National Express, and even bought its shares. However, continued uncertainty regarding the pandemic has kept is share price from flying. In the last six months, its share price has fallen by 21%, wiping out some of the gains seen in the stock market rally that started last November. The share price is also way lower than the pre-pandemic levels. This is in stark contrast with many other recovery stocks that have long surpassed their February 2020 levels. I think this indicates further potential for it.
There is already some improvement visible in results, even though they are still weak. The coach operator’s profits have improved for the half year ending 30 June compared to the year before, even though revenues have remained flat. This is because of its cost savings.
Potential synergies with Stagecoach
The company foresees more savings in costs if the merger with Stagecoach goes through, of £35m. It expects one-third of these to come from rationalisation of duplicate costs like IT and back office processes among others. It expects revenue synergies as well, as a result of an expanded footprint across the UK.
All of this sounds most promising, but I think it is important to recognise that this is not a done deal yet. We will know how the situation develops only in the next few weeks. If it does go through, it is clear that the merged company will be significantly larger in size and scope of operations.
What can go wrong
Moreover, as good as this sounds, the fact is that Stagecoach’s performance has been declining for years. And National Express too will take time to come back up to its pre-pandemic numbers. Also, mergers, even if they go through, are not always easy to navigate. In fact, according to numbers from the Harvard Business Review, 70%-90% of all mergers fail. But that is tomorrow’s problem.
Will I buy the FTSE 250 stock?
For now, I will wait a while to see how the situation develops. I will hold onto my National Express shares for now. Only once there is greater clarity on the proposed merger will I figure out the next steps, even if in the short-term there is further run-up in the National Express share price.
