Sunday 23 June 2019 7:33 pm

Activist investor Coast Capital rails against First franchise bid

An activist investor vying to shake up First Group has warned that it will pull out of a contract to run one of the UK’s leading rail franchises if it succeeds in toppling the firm’s management at a showdown on Tuesday.

Coast Capital, which owns a near 10 per cent stake in transport giant First, has called an extraordinary general meeting at which it will attempt to oust the firm’s six-strong management team with its own nominees.

Read more: Coast nominee for First Group board turns down role

The New York-based hedge fund has been agitating for a radical restructuring of the company, including that it splits its UK assets from its US assets, withdraws from Britain’s railways and overhauls its board by appointing seven of its candidates, now narrowed to six after ex-Arriva boss David Martin turned down the role.

Last month First caved into some of the pressure. It agreed to split up the group and said that while it would continue to operate its UK franchises, which include South Western Railway and the TransPennine Express, it had “concerns with the current balance of risk and reward” being offered by UK rail franchises.

Today Coast reacted furiously to reports that First is poised to win the West Coast franchise from the Department for Transport (DfT), calling it a “disturbing revelation”.

The West Coast franchise has become mired in controversy ever since rival rail giant Stagecoach was barred from the bidding process over its refusal to accept open-ended pension liabilities with the government. Reports said Whitehall is awaiting the result of Tuesday’s EGM before revealing its decision on the franchise.

James Rasteh, Coast’s chief investment officer, told City A.M: “There is no doubt that winning the West Coast franchise will result in further value destruction in a UK rail business which has already destroyed vast amounts of shareholder capital.

“It would also move First Group further away from their recently stated strategic objective of focusing more on their highly valuable US assets and businesses. Against this backdrop, there is no doubt that institutions who vote for the current chairman and CEO are not looking after their investors’ best interests.”

He added: “We also put the board of First Group on notice that, after the EGM, Coast will reserve the right to contact the secretary of state for transport and warn him of the risks of contractual non-complete if a contract is awarded by his department to First Group. As the company’s largest shareholder, we will not stand by and watch further wanton value destruction under this board.”

Rasteh also raised concern surrounding the reported intention to award the West Coast contract to First, as one of the DfT’s civil servants is the brother of First chief executive Matthew Gregory.

“The UK is not a banana republic and this is not how things should work,” Rasteh said.

Read more: First Group launches searing attack on ‘opportunistic’ activist investor

A DfT spokesperson said measures had been put in place to avoid a potential conflict of interest and that Andrew Gregory had been “recused from all discussions related to First Group, any franchise competition involving First Group, any in-life contract changes to franchises operated by First Group, and any discussions of the commercial standing of First Group or its competitors on live franchise competitions”. 

A First spokesman said: “On Tuesday, we will learn what shareholders think of Coast Capital’s plans to seize control of a UK plc without paying a premium. Coast’s plans are inconsistent and irresponsible, would leave the group with higher debt and are not in the best interests of all shareholders or our wider stakeholders.”