HEARD IN EUROPE Stagecoach Holdings Draws Fire From U.K. Competition Officials
May 18, 2011
LONDON -- Stagecoach Holdings PLC is drawing attention from U.K. competition authorities again. The acquisitive bus company has been referred to the Monopolies and Mergers Commission nine times already. Now its appetite for newly privatized rail franchises is coming under scrutiny, sparking broader debate about the pace of consolidation in the transport industry. Stagecoach's proposed acquisition of Porterbrook -- one of three rolling-stock leasing companies, or ROSCOs, spun off from the former British Rail -- has generated serious political controversy. Analysts say there's a good chance the deal will be referred to the MMC. The ROSCOs rent rolling stock to the 25 rail companies responsible for operating passenger services following privatization. Stagecoach already operates the franchise for one of these companies, South West Trains, and is bidding for 12 more. Regulators worry that the proposed Porterbrook acquisition could affect potential or existing franchise holders. More generally, the bid has given rise to controversy associated with both profits by Porterbrook directors and the sale of public assets at knock-down prices. Porterbrook was privatized in a 527-million-pound management buyout in January. Stagecoach has bid 825 million pounds, but 350 million pounds of that covers assumed debt, valuing the acquisition itself at 475 million pounds. Bus Companies Active in Rail The opposition Labour Party has issued a statement saying it views the deal as another indication of growing concentration of ownership in the privatized transport industries. Stagecoach and other leading U.K. bus companies have been among the most active participants in rail privatization, snatching five of the first 10 passenger franchises awarded. Analysts cite some synergistic benefits in operating combined bus and rail services but also point out that overdevelopment of these savings can spark concerns about potential monopoly abuse. Indeed, National Express Group has seen its accepted bid to operate the Midland Main Line rail franchise referred to the MMC. National Express is already the major bus operator in the Midlands. But Stagecoach's bid for Porterbrook raises a whole new issue of vertical integration within the rail industry. Some observers believe this runs counter to the tenor of privatization legislation, which broke the former British Rail into constituent parts of trains, passenger services and infrastructure management. ``This was done specifically to stimulate the creation of a market in rolling stock,'' said Phillip Uribe, spokesman for the Central Rail Users Consultative Committee, an independent advisory organization. ``To say that this is still in its early days is an understatement.'' Stagecoach has taken steps to pre-empt an MMC referral, holding preliminary discussions with both the rail regulator and the Office of Fair Trade, which will make the final recommendation to the Department of Trade and Industry. Election Nearing The group has offered to take measures that it believes will be sufficient to offset any genuine public-interest issues by ensuring that its actions will be transparent to regulators and that it will offer the same terms to all train operators. But recent history shows that maintaining an open dialogue with U.K. regulators isn't a guarantee of success. Noah Dunn, analyst at Yamiachi International in London, cites the precedent of the power industry, where -- in an apparent politically motivated about-face -- DTI banned electricity generators PowerGen and National Power from bidding for regional power distributors. Ironically, analysts say it may be the expectation of an imminent change in government that's driving consolidation within the transport industry. Labour campaigned strongly against rail privatization, and onlookers say that if elected, the party may take a tougher line on mergers. With a general election mandatory by the end of May 2012, there's clear incentive for transport groups to push forward any planned acquisitions, rather than to wait to see how a newly privatized company performs. Analysts say there's little doubt the Porterbrook bid makes sense for Stagecoach, however. The acquisition will add a further 263 million pounds in annual revenue. And the leasing company's business is predictable and secure, with contracts in place for the next eight years. OFT is expected to make a recommendation on the deal by mid-September. Even if the deal is eventually blocked, however, analysts are confident that Stagecoach will be able to maintain its impressive rate of growth. Steady Strong Growth Indeed, analysts say the leading U.K. bus companies are expected to become of increasing interest to institutional investors. Stagecoach already has a high profile, partly because of its unconventional origins and the impressive value it has delivered to its shareholders. Since the company was floated on the London Stock Exchange in April 1993, its market capitalization has risen from 134 million pounds to 869 million pounds, an annual average growth rate of 86.5%. To date, most of this growth has been driven by the acquisition of local, U.K.-based bus groups. Analysts say further growth opportunities in the U.K. bus market are limited because the sector is becoming overpriced. However, the group has already made forays into continental European bus markets, where privatization is just getting under way. On Tuesday, Stagecoach reached an agreement to buy Sweden's state-owned bus company, Swebus, for 232.6 million pounds.
