REG-FirstGroup PLC: Sale of First Student and First Transit

FirstgroupAnnouncement

23/04/2021 07:05

FIRSTGROUP PLC
PROPOSED SALE OF FIRST STUDENT AND FIRST TRANSIT

FirstGroup plc (“FirstGroup” or the “Group”) is pleased to announce
that it has entered into an agreement for the sale of First Student and First
Transit to EQT Infrastructure (the “Transaction”).

Summary
* c.£3.3bn ($4.6bn) headline enterprise value, including First Transit
earnout of up to c.£170m
* Transaction fully recognises the long-term, strategic value of First Student
and First Transit – headline multiple of 8.9x combined FY20 EBITDA (on a
pre-IFRS 16 basis)
* c.£2,190m initial net proceeds (after deducting First Student and First
Transit self-insurance liabilities valued at c.£390m and c.£505m in debt and
debt-like items, net working capital and other adjustments) to be used in
addressing longstanding liabilities, ensuring the Group has sufficient means
for the future development of its retained businesses, and enabling a return
of value to shareholders:
* c.£1,345m to be used to reduce indebtedness (including £300m CCFF
repayment to UK Government) and to derisk other liabilities (including for
North American legacy pensions and self-insurance)
* £336m contribution to the UK Bus and Group pension schemes (of which £116m
to be held in escrow), enabling move to low dependency funding position  
* c.£100m initial pro forma Retained Group net debt to ensure adequate
financial resources are available
* c.£365m proposed return of value (30 pence per share) to shareholders
during current calendar year
* Potential for further distributions to shareholders in due course, including
following resolution of Greyhound, crystallisation of the First Transit
earnout, and as UK end markets recover
* Ongoing FirstGroup will be a leader in public transportation focused on the
UK, with a strong platform on which to create sustainable value:
* Well-capitalised and de-risked balance sheet
* Cash generative operating model that will support an attractive dividend
* Critical enabler of economic, social and environmental goals at key
inflection point for public transport
* Transaction subject to FirstGroup shareholder approval; circular to be
published as soon as practicable
* Sale completion expected in calendar H2 2021 following North American
regulatory approval timetable
* Recent trading: Group expects adjusted operating profit for the 2021
financial year to be ahead of management’s previous expectations; current
liquidity in excess of £900m
David Martin, FirstGroup Chairman said:

“We are delighted to announce the sale of our North American contract
divisions First Student and First Transit to EQT Infrastructure for $4.6bn.
This transaction, which follows a strategic review by the Board of all options
to unlock value, enables FirstGroup to address its long-standing liabilities,
make a substantial contribution to its UK Bus and Group pension schemes and
return value to shareholders, while ensuring the ongoing business has the
appropriate financial strength and flexibility to deliver on its goals. 

“On behalf of the Board, I would like to thank all of our employees for
their hard work and commitment in dealing with the immense challenges of the
past year, and commend the team for delivering on the Board’s strategic
objective to rationalise the portfolio.”

Matthew Gregory, FirstGroup Chief Executive said:

“We are pleased to have agreed the sale of First Student and First Transit
in a transaction which recognises their full strategic value. Both are
resilient, high quality businesses with strong prospects for returning to
normal levels of service following the pandemic. Our colleagues at First
Student and First Transit have built excellent relationships with their
customers over many years, and we are proud of their commitment and expertise.
I would like to pay tribute to everyone in these businesses and acknowledge
the vital role they play in their communities, both now and for many years to
come.

“As economies begin to emerge from the pandemic restrictions and society
begins the process of building back better, the vital role of public transport
is clear. The services we provide are critical to economic activity and social
objectives including ‘levelling up’, and play an important role in
combating climate change and helping local communities flourish. Going
forward, FirstGroup will be a more focused, resilient business that is in a
strong position to deliver for bus and rail passengers in the UK, continue
investing in its zero-emissions fleet strategy and play a key role in meeting
society’s broader ESG goals.”

Investor and analyst briefing

A conference call for investors and analysts will be held at 9:00am today –
attendance is by invitation. Please email corporate.comms@firstgroup.com in
advance of the call to receive joining details. The presentation to be
discussed on the conference call, together with a pdf copy of this
announcement, will be available before the call at go to
www.firstgroupplc.com/investors/reports-and-presentations.aspx. A playback
facility will also be available there in due course.

Contacts at FirstGroup:
Faisal Tabbah, Head of Investor Relations
Stuart Butchers, Group Head of Communications
corporate.comms@firstgroup.com
+44 (0) 20 7725 3354

Contacts at Brunswick PR:
Andrew Porter / Simone Selzer, Tel: +44 (0) 20 7404 5959

Advisers:
Rothschild & Co
Joint Financial Adviser and Joint Sponsor
Avi Goldberg, Jessica Dale, Alice Squires – London
Lee LeBrun, Markus Pressdee, Jamie Anderson – New York

J.P. Morgan Cazenove
Joint Financial Advisor, Joint Corporate Broker and Joint Sponsor
Charles Harman, Richard Perelman, James Robinson, Ram Anand

Goldman Sachs International
Joint Financial Advisor and Joint Corporate Broker
Eduard van Wyk, Bertie Whitehead, Govind Shanbogue

Notes

Classification as per DTR 6 Annex 1R: 2.2. This announcement contains inside
information. The person responsible for arranging the release of this
announcement on behalf of FirstGroup is David Isenegger, Group General Counsel
and Company Secretary. Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93.

FirstGroup plc (LSE: FGP.L) is a leading provider of transport services in the
UK and North America. With £7.8bn in revenue in the year to 31 March 2020 and
around 100,000 employees, we transported 2.1bn passengers. Whether for
business, education, health, social or recreation – we get our customers
where they want to be, when they want to be there. We create solutions that
reduce complexity, making travel smoother and life easier. 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 Twitter.

Background to and reasons for the Transaction

Following the appointment of David Martin as Chairman in 2019 the Board
conducted a strategic review to consider all options to realise value for
shareholders. The Board formally announced the commencement of a sale process
for the Group’s North American contract businesses First Student and First
Transit in March 2020 in order to unlock value and focus on its bus and rail
divisions in the UK.

Having conducted a comprehensive and competitive process, the Board believes
that the best value for shareholders is achieved by the combined sale of both
First Student and First Transit. The Board unanimously believes that the
Transaction is in the best interests of shareholders for the following
reasons:
* the Transaction recognises the long-term strategic value of each of First
Student and First Transit. These businesses have leading market positions,
meaningful revenue and earnings growth potential and benefit from resilient
contract-based business models as demonstrated by their robust performance
through the COVID-19 pandemic;
* the Transaction implies a headline multiple of 8.9x the combined FY20 EBITDA
of First Student and First Transit (on a pre-IFRS 16 basis);
* the Transaction value appropriately recognises the prospects for a recovery
to normal levels of business activity which are currently being suppressed by
the effects of the COVID-19 pandemic;
* the Transaction allows the Group to make a £336m contribution to UK defined
benefit pension schemes and address other longstanding liabilities (including
those relating to the Greyhound business) while ensuring the ongoing business
is appropriately capitalised to continue investing for the future;
* the Transaction results in c.£365m being available to be returned to
shareholders through a proposed return of value by the end of the calendar
year, following realisation of the inherent value of First Student and First
Transit and the financial consequences of their sale noted above; and
* the Transaction is in line with the Group’s portfolio rationalisation
strategy to exit its North American businesses and focus on the growth and
value creation opportunities available to the Retained Group’s leading bus
and rail divisions in the UK. Greyhound remains non-core and the Group
continues to pursue all exit options for it while de-risking its liabilities
and actively managing its substantial property portfolio for value.
Information on First Student and First Transit

First Student is the largest provider of student transportation in North
America, operating in 435 locations across 40 US states and seven Canadian
provinces. First Student provides safe, reliable and cost-effective
transportation services that help school districts focus on providing students
with the best possible education. It also has a strong charter business for
student and non-school trips. The business has a wholly-owned fleet of
c.39,500 revenue-producing vehicles and operates a further c.2,500 leased or
customer-owned vehicles.

First Transit is one of the largest private sector providers of public transit
management and contracting services in North America, managing fixed route and
shuttle bus services, paratransit operations, call centres for accessible
transportation and other light transit activities. The business conducted over
300m passenger journeys in FY20 and owns or operates 12,500 vehicles. The
business has a well-established platform with the ability to capture long-term
growth in evolving transit management markets.

For the last full financial year to 31 March 2020, First Student and First
Transit together recorded revenue of $3,959.8m (£3,109.1m) and EBITDA of
$576.2m (£450.1m). For that period, adjusted operating profit was $241.6m
(£186.7m) and operating profit was $92.7m (£67.1m). The value of the total
assets the subject of the Transaction as at 30 September 2020 was $4,744.1m
(£3,722.0m).

Principal terms of the Transaction

FirstGroup will, on the terms and subject to the conditions in the purchase
agreement entered into with Recess Holdco Inc., a newly incorporated affiliate
of EQT Infrastructure V Collect EUR SCSp and EQT Infrastructure V Collect USD
SCSp (the “Purchaser”) (the "Purchase Agreement"), sell to the Purchaser
the entities comprising First Student and First Transit (the “Target
Businesses”).

The consideration payable by the Purchaser in cash at Completion is c.$3,065m
(excluding the locked box adjustments and net of transaction costs). The
Purchaser has also agreed to a deferred, contingent payment of up to $240m
(c.£170m) which will allow FirstGroup to share in the future value of First
Transit, calculated and payable on the third anniversary of closing the
Transaction or a sale of First Transit by the Purchaser, if earlier. The full
$240m would be received by FirstGroup on achievement of a First Transit
enterprise value of c.$765m, with FirstGroup sharing in any upside above an
enterprise value of $380m.

As part of the Transaction, First Student and First Transit self-insurance
liabilities valued at c.$545m are transferred to the Purchaser, as well as
c.$305m in long term debt relating to First Student and First Transit and
debt-like items and other enterprise value adjustments of c.$400m (including
pension and environmental liabilities relating to First Student and First
Transit and working capital and other deductions). In summary, the net cash
proceeds from the Transaction before the First Transit earnout are expected to
be c.$3,065m (the “Net Disposal Proceeds”), equivalent to c.£2,190m, as
shown below:

                                                                                                                $m     £m 
 Headline enterprise value                                                                                   4,555  3,255 
 First Student and First Transit self-insurance provisions                                                   (545)  (390) 
 First Transit earnout                                                                                       (240)  (170) 
 Debt transferred to the Purchaser                                                                           (305)  (220) 
 Other EV adjustments including net working capital, pension, environmental liabilities, transaction costs   (400)  (285) 
 Net Disposal Proceeds                                                                                       3,065  2,190 

The Transaction constitutes a Class 1 transaction for FirstGroup under the
Listing Rules and is, therefore, conditional on FirstGroup shareholders
passing a resolution approving the Transaction (the “Resolution”). The
Transaction is also conditional on among other things regulatory clearances
from the US Surface Transportation Board, the Canadian Minister of Transport,
provincial regulators in Ontario and Quebec and approval from the Vermont
Department of Financial Regulation, as well as antitrust clearances in the
United States and Canada (the “Closing Approvals”). The Purchaser has
agreed to use its best efforts to obtain the Closing Approvals as soon as
practicable and, in any event, on or before 22 January 2022. Completion of the
Transaction is expected to occur in the second half of the 2021 calendar year.

The Purchase Agreement contains obligations on both sides to obtain the
required approvals, as well as customary warranties, indemnities, termination
fees and cost reimbursements.

The Purchaser has agreed to pay FirstGroup a termination fee of $250m if the
Transaction fails to complete in certain specified circumstances, including
where all conditions to Completion are fulfilled in accordance with the terms
of the Purchase Agreement but the Purchaser fails to comply with its
completion obligations under it.

FirstGroup has agreed to pay the Purchaser a termination fee of c.$14m if the
Transaction fails to complete as a result of the Board modifying or
withdrawing its recommendation that FirstGroup shareholders approve the
Transaction and the Purchase Agreement is terminated by the Purchaser
following such withdrawal or modification or if the Resolution fails to be
approved.

In addition, for a limited time following completion of the Transaction, the
Purchaser has agreed that the Target Businesses will provide certain
transitional services to Greyhound.

Use of Net Disposal Proceeds and proposed return of value to shareholders

The Board will use the Net Disposal Proceeds to reduce the Group’s financial
indebtedness, discharge legacy liabilities and move its UK pension schemes to
a low dependency funding position. The Board believes these measures will
ensure the Group following completion of the Transaction (the “Retained
Group”) is in a strong position to create value for shareholders going
forward. As a result, the Net Disposal Proceeds will be applied as follows:

Reducing the Group’s financial indebtedness

The Group’s net debt as at 31 March 2021 is expected to be c.£1.4bn,
excluding the impact of Rail ring-fenced cash and IFRS 16 lease liabilities.
As part of the Transaction, c.£220m of financial indebtedness will be
transferred to the Purchaser along with the Target Businesses. The Board
believes that substantially reducing the remaining financial indebtedness of
c.£1.2bn will provide the Retained Group with significant balance sheet
strength and flexibility to navigate the current period of uncertainty and
pursue its strategy going forward. As a result, the Retained Group will retain
the £200m 2024 bond along with c.£45m in First Bus finance leases, while
repaying the remaining c.£935m of debt instruments and facilities including
the £300m in commercial paper issued through the UK Government’s Covid
Corporate Financing Facility (CCFF) scheme. Make-whole costs of c.£65m in
total will be incurred in relation to these repayments.

Discharge of certain significant liabilities

The Board believes the Transaction provides an opportunity for the Group to
address certain significant legacy liabilities relating to the Greyhound
business, fund short term capital requirements of the Retained Group as well
as the payments in relation to the rail franchise termination agreements.
Hence, the Board intends to retain c.£345m for the anticipated discharge of
these liabilities over the near term. This will allow the Retained Group to
focus on growth opportunities in its core addressable markets instead of
having to allocate further capital towards these liabilities.

Making contributions to UK Pension schemes

The Board has entered into memoranda of understanding with the First UK Bus
Pension Scheme trustee and the FirstGroup Pension Scheme trustee (together the
“Pension Trustees”) to contribute in aggregate £336m of the Net Disposal
Proceeds to improve funding and accelerate de-risking of these schemes. Of the
aggregate amount, £220m in cash will be contributed into the First UK Bus
Pension Scheme, and a further £95m held in escrow. It is expected that this
contribution to the First UK Bus Pension Scheme (which had an accounting
deficit of £171m as at 30 September 2020) will enable the Scheme to move to a
low dependency funding position. The remaining £21m will be held in escrow by
the FirstGroup Pension Scheme. Both amounts in escrow may be released back to
the Group following the conclusion of subsequent triennial valuations and
subject to scheme performance. The Transaction has no impact on the Railway
Pension Scheme or the Local Government Pension Scheme in First Bus.

Proposed return of value to shareholders and Retained Group capital structure

Given the near-term uncertainty in the Retained Group’s end markets, the
Board believes it is prudent for the Group initially to maintain significant
liquidity. Hence, of the remaining net proceeds of c.£510m, the Board intends
to return c.£365m of cash (equivalent to 30 pence per share) to shareholders
through the proposed return of value which will be executed during the current
calendar year. The Board intends to consult with major shareholders as to the
most appropriate distribution mechanism for the return of value in due course.

The Board will keep the balance sheet position of the Retained Group under
review and will consider the potential for making further additional
distributions to shareholders in due course, subject to end market outlook and
business performance, as well as further clarity on the crystallisation of the
First Transit earnout and resolution of legacy liabilities related to
Greyhound.

The expected use of proceeds is therefore summarised as follows:

                                                                                                         £m 
 Net Disposal Proceeds                                                                                2,190 
 Repayment of Government CCFF scheme funding                                                          (300) 
 Reduction of the Group’s other financial indebtedness                                                (635) 
 Make-whole costs towards repayment of Group debt instruments                                          (65) 
 Cash retained for Greyhound liabilities, rail termination sums and short term capital requirements   (345) 
 Sub-total before contribution to UK defined benefit pension schemes                                    845 
 Contribution to UK defined benefit schemes                                                           (336) 
 Net proceeds available to the Retained Group                                                           509 
 Cash in Retained Group                                                                               (144) 
 Of which, proposed return of value to shareholders in current calendar year                            365 

The Retained Group’s pro forma capital structure will therefore comprise a
cash balance of c.£145m, offsetting the £200m 2024 bond and c.£45m in First
Bus finance leases described above. Accordingly, the Retained Group will have
an initial pro forma net debt position as at 31 March 2021 of c.£100m (on a
pre-IFRS 16 basis and excluding ring-fenced First Rail cash). As set out in
the financial policy framework section below, the Board believes that the
Retained Group will in due course support greater leverage as pandemic
restrictions ease and UK end markets recover.

The future of FirstGroup – a leader in public transportation in the UK

FirstGroup is a leader in public transportation in the UK through its First
Bus and First Rail divisions. Going forward, the Retained Group has a strong
platform on which to create sustainable value, and is well-positioned to help
deliver wider economic, social and environmental goals at a key inflection
point for public transport in the UK. Following Completion and the proposed
return of value, the Directors believe that the Retained Group will be a
sustainable and cash generative business with a well-capitalised balance sheet
and an operating model that will support an attractive dividend for
shareholders.

Investment case of the Retained Group

On Completion, the Board expects FirstGroup to be a strong platform for
further value creation based on the following considerations:
* Leading positions in bus and rail transportation in the UK: First Bus is a
leader in regional bus operations outside London with a c.20 per cent. market
share and strong positions in most of its local areas of operation. First Rail
is the largest passenger rail operator in the UK by revenue with c.27 per
cent. of the national passenger rail sector through four wholly or
majority-owned operations, namely the West Coast Partnership (in which
Trenitalia is a 30 per cent. minority shareholder and which comprises
operation of Avanti West Coast and the role of ‘shadow operator’ to the
HS2 project), Great Western Railway (“GWR”; 100 per cent. owned), South
Western Railway (“SWR”; in which MTR is a 30 per cent. minority
shareholder) and TransPennine Express (“TPE”; 100 per cent. owned) as well
as one open access rail service, Hull Trains, and a second, East Coast Trains,
launching later in 2021. It also operates the Tramlink network on behalf of
Transport for London.
* Inflection point for growth, underpinned by supportive government and social
policies: public transport operators play a vital role in meeting local and
national objectives, including net zero carbon, green jobs, reduced
congestion, improved air quality, and the “levelling up” agenda,
particularly in “left behind” towns and regions, as well as the recovery
in economic and social activity following the COVID-19 pandemic. The
importance of all of these agendas to the UK was clearly indicated in the
National Bus Strategy published in March 2021, which recommits the UK
government to £3bn in investment to improve bus services and support 4,000
new zero-emission buses across the country over the current Parliament. The
Retained Group’s services are key to supporting modal shift particularly
from cars to sustainable, zero-carbon public transport, a key strand in
meeting the UK’s climate change goals.
* Digital innovation to attract more customers, enhance business efficiency
and flexibility: enhancements seek to stimulate passenger growth by delivering
FirstGroup’s vision to provide easy and convenient mobility, improving
quality of life by connecting people and communities. FirstGroup’s public
transport services offer efficient, cost effective and convenient travel
options, both within and between the UK’s congested towns and cities. Public
transport is an attractive travel choice for customers, with increasingly
sophisticated and easy-to-use journey planning tools (principally delivered
via smartphone apps), simple and value-for-money ticket products catering to a
wide range of needs, and reduced complexity and cost compared to other travel
options.
* First Bus: ready to complete trajectory to delivering a 10% margin in the
first full financial year after pandemic-related social distancing
restrictions on public transport end: Although near-term passenger volume and
revenue levels following the COVID-19 pandemic are difficult to forecast with
any certainty at present, management are readying detailed plans to realign
networks in several potential passenger volume scenarios. The Group’s
current expectation is that bus passenger volumes will recover to between 80
and 90% of pre-pandemic levels during first year after social distancing
restrictions on public transport end (noting passenger volumes recovered to
c.60 per cent. of pre-pandemic levels in some of First Bus’ local areas when
travel restrictions were partially eased during 2020). These plans will be
adapted to align with demand and growth potential, significantly aided by the
digital transformation of First Bus’ capabilities in real-time passenger
volume data capture. In the post-pandemic environment, it is possible that
passenger demand on some routes may no longer support previous levels of
commercial operations. The recently launched National Bus Strategy in England
provides a clear framework and funding for bus operators and local government
to promote bus use, and First Bus will work with local transport authorities
to develop Bus Service Improvement Plans and future statutory partnerships.
These will align services to the needs of local bus customers and enable
access to the funding available to help deliver them in the coming years.
Management expect that the revenue effect of any volume reductions will be
mitigated over time by the targeted network changes, together with a new
data-driven pricing strategy which is underway and other ticketing
innovations. Margin performance will also benefit from operational and
engineering efficiency actions already in place as well as £3m in divisional
overhead and other cost improvements made since 2019, which will enhance the
level of operational gearing to increased passenger activity.
* First Rail: well-placed for lower risk, long term and cash generative rail
operations: As the largest incumbent operator with four UK passenger rail
contracts expected to at least 2023, First Rail will benefit from the
government’s transition of the passenger rail industry’s commercial
structure to a lower-risk and more predictable National Rail Contract model.
Under the proposed new model, it is expected that operators will be paid a
fixed management fee with performance incentives for delivery against specific
punctuality and other operational targets, and it is expected that there will
be no passenger revenue risk and limited cost risk for operators, as well as
no significant contingent capital requirements. Overall, the new model is
expected to deliver a successful railway system that works better for
passengers while generating more resilient and consistent returns for
shareholders.   
* Opportunities from adjacent markets in UK bus and rail, and in new
geographies over time, leveraging the Group’s considerable industry
knowledge, skills and experience. For example, the Retained Group’s rail
division has set up open access operations (both with Hull Trains and with the
East Coast Trains open access operation which is due to start services from
London to Edinburgh later in 2021), developed and deployed new rail technology
such as next generation on-board WiFi, on-train entertainment as well as
integrated passenger information and analytics systems. First Rail also
delivers high levels of customer satisfaction and efficiency through its
integrated passenger contact centre which was built based on scalability and
the latest technology. The bespoke customer service centre operates at a lower
cost than First Rail’s previous outsourcing arrangements and provides a
single service for all customer queries across several First Rail operations.
First Rail will also seek to build on its consultancy experience as ‘shadow
operator’ to the HS2 infrastructure project since last year. First Bus is
also building on its existing platform of contracted fleet services for
commercial customers in order to deliver revenue growth and capital
efficiency.
* Critical enabler of society’s ESG goals, accelerating the transition to a
zero-carbon world: principally through facilitating modal shift from cars and
through FirstGroup’s commitments to transition its bus fleet to zero-carbon
by 2035, to cease to purchase any new diesel buses after December 2022 and to
support the UK Government’s goal to remove all diesel-only trains from
service by 2040. These commitments form part of the Group’s Mobility Beyond
Today sustainability framework and will increase its EU Green Taxonomy
eligibility year by year. The Group has also committed to implementing the
Task Force on Climate-Related Financial Disclosures (“TCFD”)
recommendations in its 2021 reporting, a year ahead of the regulatory mandate.
FirstGroup is also the first UK road and rail operator to formally commit to
setting a science-based target (“SBT”) for reaching net zero emissions by
2050 or earlier, in accordance with the SBT initiative. Alongside top decile
ratings in our sector globally from multiple ESG ratings providers, FirstGroup
is a longstanding constituent of the FTSE4Good index and was recently
recognised with a place in the 2021 Clean200 report, which ranks the world’s
largest publicly listed companies by their total clean energy revenues from
products and services that provide solutions for the planet and define a clean
energy future – the only passenger transport operator based in Europe to be
listed in this year’s report.
Financial policy framework of the Retained Group

The targeted financial policy framework for the Retained Group can be
summarised as follows:

 Metric         Objective                                                                                                                                                                                                                                                                       
 Revenue        * First Bus: Planning for a range of post-pandemic scenarios; central case envisages passenger volumes recover to between c.80 and 90% of pre-pandemic levels during first year after social distancing restrictions on public transport end, with further growth thereafter.   
                 * First Rail: opportunities to build on base business of four contracted operations with no revenue risk.                                                                                                                                                                      
 Profitability  * First Bus: targeting 10 per cent. margin in first full financial year after social distancing restrictions on public transport end.                                                                                                                                           
                * First Rail: profitability driven by delivering against performance targets under the National Rail Contracts while adding earnings in adjacent rail opportunities.                                                                                                            
                * Reduction in central costs of at least £10m per annum from FY23.                                                                                                                                                                                                              
 Investment     * First Bus: c.£90m per annum from FY23, mainly driven by the commitment to operating a zero-emission bus fleet by 2035.                                                                                                                                                        
                * First Rail: expected to continue to be cash capital-light under the National Rail Contracts.                                                                                                                                                                                  
 Leverage       * Target leverage ratio of less than 2.0x net debt (pre-IFRS 16) / Bus and non-contracted Rail EBITDA, plus contracted Rail dividends, minus central costs.                                                                                                                     
 Dividend       * Intention to pay regular dividends to shareholders commencing in FY23.                                                                                                                                                                                                        
                * Subject to a normalisation of trading conditions post-pandemic, targeting annual dividend around 3x covered by new Adjusted Profit After Tax measure.                                                                                                                         
                * Adjusted Profit After Tax defined as Bus and non-contracted Rail adjusted operating profit, plus contracted Rail dividends, minus central costs, minus treasury interest, minus tax.                                                                                          

In summary, the Retained Group is expected to be a sustainable and cash
generative business with a well-capitalised balance sheet, and an operating
model that will support an attractive dividend for shareholders.

Greyhound

Greyhound remains non-core and FirstGroup continues to pursue all exit options
for the business in order to conclude the Group’s portfolio rationalisation
strategy. Sale discussions are ongoing but the process has been affected by
the pandemic’s impact on this passenger volume-based business. The impact on
Greyhound’s financial performance and cash generation continues to be
mitigated by tight cost control and recoveries of 5311(f) grants for operating
key coach services under the US CARES Act. As noted above, c.$250m of the Net
Disposal Proceeds will be utilised to buy out the legacy pension and
substantially de-risk the self-insurance liabilities associated with
Greyhound. The liability de-risking will result in Greyhound having a better
capitalised balance sheet, which also includes its substantial property
portfolio which the Group will continue to actively manage for value as part
of Greyhound’s network transformation plans. For the purposes of the
Retained Group pro forma net debt position, c.£15m of finance leases
attributable to Greyhound have been excluded.

FirstGroup Board

As a natural consequence of the Transaction and as the Group enters a new
strategic phase, the composition and background of the Board will evolve.
FirstGroup has separately announced today that Jane Lodge and Peter Lynas will
be joining the Board as non-executive directors on 30 June 2021. David Robbie
has also notified the Group that he will not seek re-election at the 2021 AGM
and will stand down from the Board on 30 June 2021. The Nomination Committee,
led by Chairman David Martin, will continue to oversee an orderly and
appropriate evolution of the Board in order to ensure it has the right balance
of skills, experience and diversity for the Retained Group’s future needs.

Current trading and liquidity position

Whilst some uncertainty remains due to the COVID-19 pandemic, the Board’s
visibility over the Group’s performance has continued to improve since the
half-yearly results announced on 10 December 2020. Due to strong cost control
and other actions to manage the consequences of the pandemic, FirstGroup now
expects adjusted operating profit for the 2021 financial year to be ahead of
management’s previous expectations.

Since the Group’s last update in December 2020, the proportion of First
Student’s bus fleet operating either full service or on a hybrid basis has
increased, to 95% in the second week of April, and First Transit’s service
levels have remained broadly stable. Greyhound volumes have improved modestly
and the division is now operating just over half of its pre-pandemic mileage.
Passenger volumes in First Bus and First Rail have also increased as UK
lockdown restrictions have started to ease.

The Group has continued to take all prudent and appropriate action to maintain
a robust financial position and strong liquidity. The Group’s free cash
(before rail ring-fenced cash) and committed undrawn banking facilities was
c.£905m as at 22 April 2021. Since the last liquidity update in December
2020, the Group has repaid the £350m April 2021 bond mainly funded from
drawdown of the £250m bridge facility entered into in March 2020, secured
£102m in cash proceeds from the sale of Greyhound properties announced at the
end of December 2020, while operating cash flow in the second half of the
financial year was positive and ahead of our expectations. In March the Group
renewed the £300m in commercial paper issued through the CCFF scheme for a
further year and secured a further £300m committed bridge facility from the
CCFF maturity in March 2022, thereby providing adequate financial resources
for the short to medium term.

Important information regarding forward-looking statements

This document includes statements that are, or may be deemed to be,
forward-looking statements. These forward-looking statements can be identified
by the use of forward-looking terminology, including the terms anticipates,
believes, could, estimates, expects, intends, may, plans, projects, should or
will, or, in each case, their negative or other variations or comparable
terminology, or by discussions of strategy, plans, objectives, goals, future
events or intentions.

These forward-looking statements include all matters that are not historical
facts. They appear in a number of places throughout this document and include,
but are not limited to, statements regarding FirstGroup and its intentions,
beliefs or current expectations concerning, among other things, the business,
results of operations, prospects, growth and strategies of the Group, the
Target Businesses and the Retained Group.

By their nature, forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances. Forward-looking
statements are not guarantees of future performance and the actual results of
operations of the Group, the Target Businesses and the Retained Group, and the
developments in the industries in which they operate, may differ materially
from those described in, or suggested by, the forward-looking statements
contained in this document. In addition, even if the results of operations of
the Group, the Target Businesses and the Retained Group and the developments
in the industries in which they operate are consistent with the
forward-looking statements contained in this document, those results or
developments may not be indicative of results or developments in subsequent
periods. A number of factors could cause results and developments to differ
materially from those expressed or implied by the forward-looking statements
including, without limitation, general economic and business conditions,
industry trends, competition, changes in law and regulation, currency
fluctuations, changes in business strategy and political and economic
uncertainty.

Forward-looking statements may, and often do, differ materially from actual
results. Any forward-looking statements in this document reflect the Group’s
current view with respect to future events and are subject to risks relating
to future events and other risks, uncertainties and assumptions relating to
the Group and its operations, results of operations and growth strategy.
Shareholders should specifically consider the factors identified in this
document which could cause actual results to differ before making a decision
on the Transaction.

The unaudited pro forma financial information is shown for illustrative
purposes only and because of its nature addresses a hypothetical situation. It
does not represent the actual financial position of the Retained Group.
Furthermore, it does not purport to represent what the Retained Group’s
financial position would actually have been if the Transaction had been
completed on the indicated date and is not indicative of the results that may
or may not be expected to be achieved in the future

No statement in this announcement is intended as a profit forecast or estimate
for any period and no statement in this announcement should be interpreted to
mean that earnings, earnings per share or income, cash flow from operations or
free cash flow for the Group and the Target Businesses, as appropriate, for
the current or future financial years would necessarily match or exceed the
historical published earnings, earnings per share or income, cash flow from
operations or free cash flow for the Group and the Target Businesses, as
appropriate.

Other than in accordance with its legal or regulatory obligations (including
under the Listing Rules, the Disclosure Guidance and Transparency Rules and
the Prospectus Rules), the Group is not under any obligation and the Group
expressly disclaims any intention or obligation (to the maximum extent
permitted by law) to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

Cautionary statement

This announcement is not intended to, and does not constitute, or form part
of, any offer to sell or an invitation to purchase or subscribe for any
securities or a solicitation of any vote or approval in any jurisdiction.
FirstGroup shareholders are advised to read carefully the formal documentation
in relation to the Transaction once it has been despatched. Any response to
the Transaction should be made only on the basis of the information in the
formal documentation to follow.

Important information relating to financial advisers

N.M. Rothschild & Sons Limited (“Rothschild & Co”) is authorised and
regulated in the United Kingdom by the FCA and is acting exclusively for
FirstGroup and no one else in connection with the contents of this document
and any other matters referred to in this document and will not regard any
other person (whether or not a recipient of this document) as a client in
relation to any other matters referred to in this document and will not be
responsible to anyone other than FirstGroup for providing the protections
afforded to its clients, or for providing advice, in relation to the contents
of this document or any other matter or arrangement referred to in this
document,

Rothschild & Co does not accept any responsibility whatsoever for the contents
of this document, including its accuracy, completeness or verification, or for
any other statement made or purported to be made by it, or on its behalf, in
connection with FirstGroup and/or any other transaction or arrangement
referred to herein. Rothschild & Co accordingly disclaims, to the fullest
extent permitted by applicable law, all and any duty, liability, or
responsibility whatsoever whether arising in tort, contract or otherwise,
which it might otherwise have in respect of this document or any such
statement. No representation or warranty, express or implied, is made by
Rothschild & Co or any of its affiliates as to the accuracy, completeness,
verification or sufficiency of the information set out in this document, and
nothing in this document will be relied upon as a promise or representation in
this respect, whether or not to the past or future, provided that nothing in
this paragraph shall seek to exclude or limit any responsibilities or
liabilities which may arise under the FSMA or the regulatory regime
established thereunder.

Goldman Sachs International is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the Prudential
Regulation Authority. Goldman Sachs International is acting exclusively for
FirstGroup and no one else in connection with the Transaction and will not
regard any other person (whether or not a recipient of this announcement) as a
client in relation to the Transaction and will not be responsible to anyone
other than FirstGroup for providing the protections afforded to Goldman Sachs
International's clients nor for giving advice in relation to the Transaction
or any other arrangement referred to in this announcement.

J.P. Morgan Securities plc, which conducts its UK investment banking business
as J.P. Morgan Cazenove (“J.P. Morgan Cazenove”), and which is authorised
in the United Kingdom by the Prudential Regulation Authority (the “PRA”)
and regulated by the PRA and the Financial Conduct Authority,  is acting as
financial adviser exclusively for FirstGroup and no one else in connection
with the Transaction and will not regard any other person as its client in
relation to the Transaction and will not be responsible to anyone other than
FirstGroup for providing the protections afforded to clients of J.P. Morgan
Cazenove or its affiliates, nor for providing advice in relation to the
Transaction or any other matter or arrangement referred to herein.

Exchange rates

Throughout this announcement, unless otherwise stated, the USD to GBP exchange
rate used in this document is as derived from FactSet on the latest
practicable date prior to this announcement, being $1.40 to £1.00.

Rounding

Percentages in this document have been rounded and accordingly may not add up
to 100 per cent. Certain financial data have also been rounded. As a result of
this rounding, the totals of data presented in this document may vary slightly
from the actual arithmetic totals of such data.



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