REG-FirstGroup Plc: Agreement to acquire RATP London

FirstgroupAnnouncement

10/12/2024 07:15

FIRSTGROUP PLC

agreement to acquire bus operator RATP London

 

FirstGroup plc (the `Group') is pleased to announce that it has signed an
agreement to acquire RATP Dev Transit London Limited and its subsidiaries
(`RATP London') from RATP Développement SA (`RATP Dev') for an enterprise
value of £90 million (the `Acquisition').

 

The Acquisition will see the Group enter the London bus market with a strong
position and will further grow and diversify the Group's revenue. RATP London
is one of the principal bus operators in the capital, with a c.12% market
share, comprising:  

 
* 10 depots across Central and West London (four owned and six leased);
* a fleet of c.1,000 buses of which a third are fully electric;
* c.3,700 employees over 80% of whom are drivers;
* c.90 Transport for London (`TfL') route contracts, typically of seven-year
term; (weighted average remaining contract life of 3.3 years)
* revenues of £271m for the year ended 31 December 2023; and 
* an experienced management team with a proven track record of developing and
implementing a comprehensive turnaround plan that includes enhanced bid
discipline and improved operational and cost performance
The enterprise value is underpinned by c.£100m of physical assets including
freehold property of c.£50m.

The Acquisition will be financed with £45 million from the Group's existing
cash reserves and the assumption of RATP London's asset backed vehicle
finances leases (c.£45m).

Following completion of the Acquisition, the Group anticipates:
* the Acquisition will be broadly earnings neutral in FY 2025 and FY 2026;
onerous contract provisions totalling c.£40-50m will be utilised over several
years;
* as the route contract portfolio evolves over the next five years, annual
revenues are expected to grow to £300-350m, with operating margins in line
with historical London levels of c.6-7%;
* looking ahead, in addition to the measures included in the current
turnaround plan, the Group has identified a number of potential synergies that
could further enhance profitability;  
* operating cash outflows of c. £30m, after bus operating lease payments and
capex, in the first two years of ownership, following which the business is
expected to be operating cash positive from FY 2027 onwards;  
* RATP London's current management team will transfer with the business and
are expected to be retained post-acquisition. 
The Acquisition is subject to French government approval (in its capacity as
the ultimate owner of the business) and is conditional on TfL consent to the
change of control. The Group anticipates completion of the Acquisition in H1
Calendar Year 2025.

Graham Sutherland, FirstGroup Chief Executive Officer said:

"This is a significant acquisition for the Group that will diversify our
portfolio and materially grow our earnings in the medium term. It allows us to
enter the London bus market at scale and will also bolster our credentials as
we participate in future franchising opportunities across the UK.

 

"We look forward to continuing to build on our relationship with TfL and
welcoming RATP London's employees into the Group, to continue the
transformation of the business and to capitalise on the growth potential in
the London market."

 

 

 

Investor & Analyst webcast

A webcast for investors and analysts will be held at 09:00 (GMT) today. To
request the webcast details, please email corporate.comms@firstgroup.co.uk. To
access the presentation slides, together with a pdf copy of this announcement,
go to www.firstgroupplc.com/investors. A recording of the webcast will also be
available on the website in due course.

 

Notes to Editors

 

Operational and financial overview

RATP London was formed through the consolidation of London United, London
Sovereign and London Transit bus companies. RATP London is most prominent in
West London, and also operates in the north-west and south-west of the
capital.

 

RATP London has c.3,700 employees and operates a fleet of c.1,000 buses out of
four owned and six leased depots, as well as a number of smaller ancillary
properties, in Central and West London. The four freehold depots have existing
use value of c.£50m. The freehold depots are located in Fulwell, Hounslow,
Shepherds Bush and Stamford Brook, with leasehold depots in Edgware, Harrow,
Hounslow, Park Royal, Tolworth and Westbourne Park. 

 

The majority of the senior management team joined the company over the last
three years and have developed and implemented a comprehensive turnaround plan
for the business. Good progress has been made since the implementation of the
plan, both in enhanced bid discipline with c.30 routes rebid over the past two
years, including the early termination of loss making routes at contract
review dates as well as improved operational performance and cost control, and
workforce stabilisation. This improvement in performance can be seen in the
TfL Q2 FY 2025 Bus Operator League Tables, with the three subsidiaries
occupying first, second and fourth place in the league table for "operated
mileage before non-deductible losses".

 

RATP London operates c.90 routes on behalf of TfL. These route contracts
typically have a seven year maturity with on average, c.13 contracts in the
portfolio renewed each year. As the route contract portfolio evolves over the
next five years, the Group anticipates that annual revenues will grow to
£300-350m, with operating margins in line with historical norms in London of
c.6-7%.

 

RATP London reported group revenues of £271m for the year ended 31 December
2023. The Group anticipates that the Acquisition will be broadly earnings
neutral in FY 2025 and FY 2026, after the utilisation of onerous contract
provisions of c.£40-50m that recognise contracts entered into prior to 2022
and were subsequently impacted by material labour market cost increases. The
Group will recognise these provisions on acquisition. The onerous contract
loss provision release matches the losses being incurred on these contracts
and will result in a broadly neutral impact in the Group's profit and loss
accounts.

 

Buses are currently acquired under operating leases, which the Group will
review going forward. The Group anticipates aggregate capital expenditure of
c.£40-50m which excludes bus acquisitions, over the first three years of
ownership relating primarily to depot electrification, charging
infrastructure, existing fleet replacement batteries, and a small amount of
spending on other non-current assets. The capex forecast excludes the buses
that may be acquired under operating leases and this will be reviewed in the
context of the Group's wider approach to electrification.

 

TfL is targeting an entirely zero-emission bus fleet by 2034 at the latest and
electrification is now compulsory in the bidding process. RATP London has been
an early mover in bus fleet and infrastructure electrification, with a third
of the fleet electric. The Group will seek to capitalise on electrification
expenditure efficiencies through its existing capabilities and arrangements. 

 

The Group anticipates operating cash outflows of c. £30m after bus operating
lease payments and capex, in the first two years of ownership, with the
business expected to be operating cash generative from FY 2027 onwards.

 

Looking ahead, in addition to the measures included in the current turnaround
plan, the Group has identified a number of synergies that could further
enhance profitability. These include fuel and electricity pricing, insurance,
on bus advertising, materials contracts, fleet purchasing, vehicle sale
benefits through the use of the Group's Ensignbus business, and through the
merging of some back-office functions. The Group will also consider the future
financing of electric buses, including the potential benefits of bringing
electric bus batteries into its joint venture with Hitachi Zero Carbon.

 

 

 

Impact on the Group's FY 2025 and FY 2026 financial outlook

Should the Acquisition complete in the fourth quarter of the Group's financial
year ending March 2025, it is anticipated that its FY 2025 net capital
expenditure will be c.£125m and year-end adjusted net debt will be c.£110m.
The Group will also recognise additional IFRS16 lease liabilities of c.£60m
in FY 2025.

 

In FY 2026, RATP London is anticipated to make a small contribution to the
First Bus adjusted operating profit, at a lower margin, and the Group's net
capital expenditure is expected to increase to c.£125m, with the majority of
expenditure in First Bus electrification. There will be an increase in the
Group's interest cost of c.£6m, including IFRS 16, relating to the
Acquisition, and the Group's FY 2026 year-end Adjusted net debt is expected to
be c.£130m.

 

Share Purchase Agreement terms

Under the terms of the Share Purchase Agreement (`SPA'), FirstGroup plc will
acquire, through its wholly-owned subsidiary, First Bus Holdings Limited
(`First Bus'), the entire issued share capital of RATP Dev Transit London Ltd
and its three operating subsidiaries, London Transit Limited, London Sovereign
Limited and London United Busways Limited, from RATP Dev UK Ltd (the
`Seller'), a wholly-owned subsidiary of RATP Dev. The consideration will be
paid in full on completion, subject to a normal post-completion true-up
process. The entire debt of RATP London will be assumed or repaid by the
Seller's group prior to completion, apart from the debt relating to hire
purchase and lease finance obligations (projected to be c.£45m as at 31
December 2024) which are expected to remain with RATP London at completion.

 

The Group has provided a parent company guarantee to underpin the obligations
of First Bus under the SPA, and similarly the Seller's parent, RATP Dev,
guarantees the obligations of the Seller. The SPA includes a customary suite
of warranties and indemnities, subject to caps and limitations as appropriate.

 

The Seller is required to carry on operating and funding the business in line
with past practice in the period to completion. A limited suite of
transitional services will continue to be provided by the Seller and its group
for a short period post-completion under the terms of a Transitional Services
Agreement  (`TSA'). Satisfaction of the conditions is subject to a longstop
date of 30 April 2025. The current management team will transfer with the
business and are expected to be retained post-acquisition.

 

London bus market1

London is a £2.1bn bus market, accounting for around 46% of the entire UK bus
market. There are c.9,000 buses in London, with the market primarily served by
six major operators.

 

Bus patronage is expected to continue to recover back to pre-Covid levels,
supported by modest population growth across London, further growth in tourist
volumes, continued declines in car utilisation and investment in the expansion
of the bus network. TfL's Business Plan expects bus patronage to grow at c.4%
per annum between 2025 and 2027, recovering fully to pre-Covid levels by 2027.

 

Looking at modal share, despite a slight shift towards the London Underground
and more recently, suburban rail networks, bus remains the primary mode of
transport within London, with an average of 192 journeys per capita in 2023
(accounting for >50% of all journeys made).

 

The size of the London bus network has also been resilient, with a broadly
stable number of network miles operated between 2012 and 2020, and only a very
modest decline between 2020 and 2024. This reflects the consistent levels of
funding allocated to support operators, with long-term funding growth of c.3%
per annum between 2004 and 2023 demonstrating TfL's commitment to bus. In 2023
Bus accounted for approximately 25% of total TfL operating expenditure
(equivalent to £2.1bn per annum).

 

Overview of TfL contracts

London bus operations are entirely regulated by TfL, with each individual
route forming a contract which is bid for by authorised private sector
operators. TfL decide the contract specifications for a given bus route,
control ticket prices and collects passenger revenue. Operators own the buses
and depots, and source and pay drivers to run routes. The proximity of the
line of route to the operator's depot and staff changeover facilities is
therefore key to maximising efficiency and being competitive on bid price.

 

Individual route contracts are tendered competitively by TfL, generally over
seven-year terms, resulting in a franchising model where there is minimal risk
of losing large parts of the business at one time, and with a view to full
decarbonisation of the fleet.

 

The route contracts bear no revenue risk on the base price bid. Inflation is
allowed for based on 85% of revenue against which CPI is applied, and TfL
assuming 15% of bus operator cost base does not inflate.

 

TfL is entitled to make deductions for lost mileage (at a specified rate per
mile) where caused by reasons within the operator's reasonable control (such
as missing drivers or mechanical breakdown), and fares payment irregularities
(i.e. underpayment by passengers). Operators are not penalised for lost
mileage that is not within their control, for example traffic or roadworks
delays.

 

In addition, operator performance is measured and incentivised / penalised
through quality of service indicators within the contracts, known as Quality
of Service Indicators (`QSIs'). Under the QSI regime, bonus payments and
liquidated damages are based on the operator's performance against a defined
minimum performance standard of Excess Wait Times (`EWT') or a minimum
percentage of "On-Time" services. Bonuses are earned up to an annual maximum
15% of contract payments (less any deductions for lost mileage) (the `Contract
Sum') for good performance, with liquidated damages for poor performance
capped annually at 10% of the Contract Sum.

 

1 Source: TfL data

 

 

 

 Contacts at FirstGroup: Marianna Bowes, Head of Investor Relations Stuart Butchers, Group Head of Communications corporate.comms@firstgroup.co.uk Tel: +44 (0) 20 7725 3354  Contacts at Brunswick Group: Andrew Porter / Simone Selzer Tel: +44 (0) 20 7404 5959  

 

 Contacts at Panmure Liberum (Corporate Broker): Nicholas How / John More Tel: +44 (0) 20 3100 2000  RBC Europe Limited (Financial Adviser and Corporate Broker): Philip Turville / James Agnew / Jack Wood Tel: +44 (0) 20 7653 4000  

 

 

This announcement contains inside information and the person responsible for
publishing the announcement is David Blizzard, Company Secretary.

 

Notes

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per DTR
6 Annex 1R: 3.1.

 

Forward-looking statements

Certain statements included or incorporated by reference within this
announcement may constitute 'forward-looking statements' with respect to the
business, strategy and plans of the Group and our current goals, assumptions
and expectations relating to our future financial condition, performance and
results. By their nature, forward-looking statements involve known and unknown
risks, assumptions, uncertainties and other factors that cause actual results,
performance or achievements of the Group to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. No statement in this announcement should be
construed as a profit forecast for any period. Shareholders are cautioned not
to place undue reliance on the forward-looking statements. Except as required
by the UK Listing Rules and applicable law, the Group does not undertake any
obligation to update or change any forward-looking statements to reflect
events occurring after the date of this announcement.

 

About FirstGroup

FirstGroup plc (LSE: FGP.L) is a leading private sector provider of public
transport services. With £4.7 billion in revenue and around 30,000 employees,
we transported almost 2m passengers a day in FY 2024. We create solutions that
reduce complexity, making travel smoother and life easier. Our businesses are
at the heart of our communities and the essential services we provide are
critical to delivering wider economic, social and environmental goals. Each of
our divisions is a leader in its field: First Bus is one of the largest
regional bus operators in the UK, serving more than 20% of the population in
the UK with a fleet of around c.4,800 buses, and carrying more than a million
passengers a day. First Rail is one of the UK's largest rail operators, with
many years of experience running long-distance, commuter, regional and sleeper
rail services. We operate a fleet of c.3,700 locomotives and rail carriages
through three DfT contracted train operating companies: WCP (incorporating
Avanti West Coast and West Coast Partnership Development), GWR and SWR) and
two open access routes (Hull Trains and Lumo). We are formally committed to
operating a zero-emission First Bus fleet by 2035, and First Rail will help
support the UK Government's goal to remove all diesel-only trains from service
by 2040. During FY 2024 FirstGroup was named as one of the world's cleanest
200 public companies for the fifth consecutive year and achieved Industry
Top-Rated status for the first time with Sustainalytics. We provide easy and
convenient mobility, improving quality of life by connecting people and
communities. Visit our website at www.firstgroupplc.com and follow us
@firstgroupplc on X.



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