FirstGroup shareholders’ revolt grows over sale of US bus business


SAN FRANCISCO, CALIFORNIA – SEPTEMBER 13, 2018: A First Student school bus picks up students in San Francisco, California. First Student Inc. is North America’s leading provider of school bus transportation.

Robert Alexander/Getty Images

LONDON – British multinational transport company FirstGroup is facing a shareholder rebellion over the sale of its two US bus companies – one of which operates the iconic yellow school buses – to Swedish private equity firm EQT.

The Aberdeen-based company’s two main shareholders, Coast Capital and Schroders, have announced public opposition to the $4.6 billion sale of First Student, the largest school bus operator in the US, and outsourced public transit operator First Transit to EQT Infrastructure .

Glass Lewis, one of the world’s largest shareholder proxy advisors, will also vote against the transaction at FirstGroup’s May 27 annual meeting, citing “poor transaction timing and inadequate valuation.”

Coast Capital CIO James Rasteh told CNBC on Friday it would be “very irresponsible to vote for this transaction,” which he says represents “a clear value destruction.”

The two companies account for a significant chunk of FirstGroup’s global revenue, but the company has instead chosen to focus on its UK bus and train operations, along with the sale of US intercity bus service Greyhound.

According to data from Refinitiv, Coast Capital owns a 14% stake in FirstGroup, while Schroders owns 12%. The company’s third-largest shareholder, Columbia Threadneedle, supported the sale of EQT along with proxy advisory agencies ISS, IVIS and PIRC.

The backlash centers on FirstGroup’s rejection of other proposals for the sale of its US operations. According to two senior banking sources with knowledge of the process, who wished to remain anonymous due to their professional reputation, an alternative proposal would have potentially yielded higher long-term returns for shareholders than the proposed transaction with Swedish private equity firm EQT.

An email in late April from sales advisor JPMorgan Cazenove to FirstGroup executives, including CEO Matthew Gregory, seen by CNBC addresses a proposed $4.7 billion takeover of the U.S. companies that according to sources from the SPAC (Special Purpose Acquisition Company) division of UBS.

The sources claim the deal would have allowed the two companies to go public as US companies, with current shareholders retaining their stake and receiving the value created by the sale. The EQT offer is quoted in the email as being valued at $4.5 billion with approximately $1.17 billion worth of deductibles.

JPMorgan Cazenove’s rep, who advised on the sale of EQT’s infrastructure along with Rothschild & Co. and Goldman Sachs, says Coast Capital is likely to find the proposal “probably at least 25% more attractive than EQT’s offer,” though the representative does not confirm that it is worth 25% more. The email also adds that Coast Capital “wants to feel like we’ve had an open mind and not been too quick to dismiss it.”

FirstGroup Response

In a statement on Friday, FirstGroup accused Coast of relying on a “grossly misleading” EBITDA (earnings before interest, taxes, depreciation and amortization) figure due to errors in accounting for foreign exchange rates, earnout (future compensation for the company’s vendors) based on financial performance or future sales), working capital and deferred capital expenditure. The company also attacked the hedge fund’s book value multiples and peer comparisons.

Coast Capital issued its own detailed response to those allegations in a statement Monday, alleging several inaccuracies in FirstGroup’s presentation of the numbers and alleging that the company attempted to “use accounting tactics to attempt to correct the apparent inaccuracies and… to hide the exceptionally low rating of this offer
Seats on shareholders’ most valuable assets.”

“The board also doesn’t seem to understand that these companies will benefit from tangible federal subsidies and a reopening and recovery of the US economy,” he added.

FirstGroup has reiterated that it has embarked on a “comprehensive and competitive sales process” involving more than 40 bidders and said all of Coast Capital’s proposals have been carefully considered over a number of years.

CINCINNATI – JULY 22: FirstGroup America headquarters photographed from the observation deck of Carew Tower in Cincinnati, Ohio on July 22, 2017.

Raymond Boyd/Getty Images

FirstGroup cited an earnout structure for First Transit in which the company will receive 62.5% of the $380 million value of First Transit “either on the third anniversary of the sale or earlier if Transit is sold to a third party.” .

“When I joined the board in August 2019, I made it clear that my goal is to unlock value within the group,” FirstGroup chairman David Martin said in Friday’s statement.

“Following a full strategic review, we have completed a comprehensive and high-profile sale process that delivers full value and enables the group to return value to shareholders, address legacy challenges and strengthen its position for the future.”

Coast Capital has disputed this, claiming that if EQT doesn’t resell the company for a higher value within three years, a messy arbitration process is likely to ensue as the private equity firm and shareholders attempt to establish a fair equity value for the company to achieve.

“We are pleased to include the earnout as part of the multiple if they have prepaid it,” said Chad Tappendorf, partner at Coast Capital. “But they don’t, and it’s not market practice at all, something that’s not safe to include in a headline multiple.”

When management first announced the sale with a presentation of the value achieved, FirstGroup’s share price rose 17% to an intraday high of 101.30 pence on April 23, 2021. However, Tappendorf noted that shareholders were reviewing the presentation and getting started Questioning the value allotted by the company, the share price fell by around 27% to 73.10p over the following two weeks.

The two senior banking sources claimed that after starting the process ahead of the Covid-19 crisis, FirstGroup refused to consider options beyond the EQT deal after issuing a “no-shop” deal prior to the announcement. Clause” with the Swedish private equity firm intended to sell the company.

“The decisions they made 18 months ago were the right decisions, but they haven’t updated those decisions for the new world,” a source said.

“For the process they conducted, this was a fair price, but the process was the wrong one.”

However, in its voting recommendation report, voting rights advisor ISS noted that while the no-shop clause prevents the board from “soliciting, soliciting or encouraging potential bidders” to submit a competing bid, it would be permitted to submit an “unsolicited bid.” “competing offer” to be considered “as long as it is received before the resolution is approved by shareholders and constitutes a “superior offer”.

Another source, an independent transatlantic M&A professional with direct knowledge of the sale process who chose to remain anonymous for commercial reasons, told CNBC that “the lack of the Fairness Opinion suggests that FirstGroup management, in the rush to completing this transaction was a bad deal.”

A fairness opinion is a summary letter prepared by an investment bank or independent third party that determines whether the terms and finances of a merger or acquisition are fair.

“The lack of a fairness opinion from an independent advisor, as well as mounting evidence from Coast Capital that more attractive alternatives exist that continue to be ignored, are all evidence of a board failure in fiduciary responsibilities,” Coast added in his statement Monday.

While no fairness opinion was provided, FirstGroup was advised by three investment banks during the sale process.


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