West Coast Saga Splits FirstGroup Investors

FirstGroup’s biggest investors are split over how the debt-laden transport company should move forward after the collapse of its winning bid to run the West Coast main line. The company’s victory in August had alleviated concerns over FirstGroup’s stressed balance sheet and flat-to-falling cash flows this year. But the government’s decision to cancel the award has put the group under renewed pressure. Analysts put the company’s 2013 net debt at three times earnings – below the level at which it would breach banking covenants but above a targeted multiple of 2.5. Brewin Dolphin’s preferred solution is a dividend cut rather than a rights issue – which it believes would need to be done at a fairly significant discount – or a disposal of one of FirstGroup’s bus divisions. FirstGroup’s board has promised a dividend this year that is 7 per cent higher than last year’s payout. After falling profitability at its US school bus and UK bus divisions, however, and the West Coast cancellation, the company might have to pay that with debt. Barclays analysts on Monday estimated that shares in FirstGroup were already factoring in a £500m rights issue. They added: “Additional earnings weakness through the year would push management to more aggressively de-lever, in our view: by lowering its dividend (which we now assume) and/or raising equity.” go to link>>>