RAIL group FirstGroup yesterday reassured investors that potential losses on the hotly-contested West Coast main line could not exceed £265m, as shares in the firm slumped on news it had won the contract.
The rail operator yesterday beat off a bid from incumbent operator Virgin Rail Group to land the Scotland to London route, with promises it will pay the government £5.5bn over 13 years. Virgin’s Sir Richard Branson branded the bid “insane”.
But the company will cap the amount it could potentially lose on the franchise by using a ring-fenced subsidiary to secure the deal, which only has £265m of upfront capital at risk. The deal is a similar arrangement to that used by National Express to secure the East Coast mainline.
Controversially, the government had to pick up the tab for the botched East Coast deal – which lost £20m in its first half year – after the firm sought to renegotiate its contract.
National Express walked away but was able to insulate itself from potential losses and further government action by using the ring-fenced franchise arrangement.
The FirstGroup franchise has a £190m fixed-rate loan – without indexation – and £10m of ordinary share capital.
The franchise also includes a promise to pay a £45m inflation linked performance bond, a £5m season ticket bond and to make £15m in station repairs.
An equity analyst who did not want to be named, said: “This is asymmetric risk. If it all goes wrong, FirstGroup can walk away.”
The government’s decision to award the contract to FirstGroup drew a flurry of criticism from Virgin founder Sir Richard and caused shares in FirstGroup to fall eight per cent yesterday. Sir Richard said that Virgin did not outbid FirstGroup because it “did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise”.
He also blasted as “insanity”, the Department for Transport’s decision to award the contract to a bidder promising higher revenues.
FirstGroup shares opened at 264p but ended the day at 243p as the markets digested the news.
A spokesman for FirstGroup said the structure used was a standard one in rail franchises.
The DfT said the bid was “deliverable and financially robust”.