ES in FirstGroup plunged 30 per cent yesterday as the rail and bus firm confirmed a £615m discounted rights issue and the departure of chairman Martin Gilbert.
Chief executive Tim O’Toole said the cancellation of its West Coast rail contract and the subsequent months of uncertainty in the rail business had forced the firm to issue shares to protect its investment-grade credit rating.
“Every option we looked at led back to this as the best solution for the long-term for shareholders,” he told reporters, adding that a drop in First’s BBB credit rating would have meant £50m a year in extra financing costs.
O’Toole said the board had also looked at selling a major division such as Greyhound “in some detail with outside support as well”, but that such a deal “would not fix the problem”.
The underwritten three-for-two rights issue is at a 39.5 per cent discount to the firm’s theoretical ex-rights share price.
“The delay in the rail refranchising programme… completely changes the trajectory for the group in terms of when debt paydowns could be made,” said O’Toole.
The government restarted franchise contests in January, having frozen the process in October when errors were found in its sums.
FirstGroup, which has net debts of £1.98bn following the 2007 purchase of US bus group Laidlaw, also confirmed it was axeing its dividend.
The firm’s results, released two days early, revealed an 86.7 per cent drop in pre-tax profits to £37.2m, on revenues up 3.3 per cent at £6.9bn.
Gilbert will step down once a successor is found, ending 27 years with the firm. “Martin had indicated last year that his instinct was to move on but the kind of man Martin is, he refused to move on until he had clarity on the business going forward,” said O’Toole.
His name might not have been on the official press release but bankers on the deal say that Ian Hannam, the veteran corporate financier, played an important role in helping FirstGroup organise its rights issue.
Hannam, who left JP Morgan last year in order to fight a disciplinary procedure taken out against him by the former City regulator the FSA, gave the FirstGroup board advice during the process. He used to advise the company while at JP Morgan.
He is believed to have suggested adding Bank of America Merrill Lynch (BAML) as a joint bookrunner on the FirstGroup deal, to work alongside joint sponsors JP Morgan and Goldman Sachs.
Hannam’s role in the deal on behalf of Strand Partners will be seen as significant because he is known as one of the City’s most prolific dealmakers.
Since leaving JP Morgan after being accused of non-deliberate market abuse, a charge he is contesting, Hannam has been working on deals but these have been principally confidential projects. He was fined by the regulator but still has approval to work in the City.
Rupert Hume-Kendall, who is currently bringing the insurance group Partnership to market via an IPO, leads the Bank of America Merrill Lynch team ,where he is ably supported by the energetic Oliver Holbourn and Daniel Burton-Morgan.
Goldman Sachs’ team included Anthony Gutman, City veteran Phil Raper and Eduard van Wyk.
JP Morgan’s team included Malcolm Moir, Jonathan Wilcox and Guy Marks.
By David Hellier