Stagecoach/National Express: defensive bus deal needs more axle grease

Stagecoach/National Express: defensive bus deal needs more axle grease

Vulnerable survivors sometimes huddle in an old bus in fictional post-apocalyptic worlds. In pandemic-era Britain, struggling bus companies are banding together for safety too. National Express wants to bring rival Stagecoach under its cover with an all-share takeover, valuing the smaller operator at £470m on Tuesday.

That compares with a peak 10-year worth of £2.4bn in 2015. After that, the wheels came off. Founded by former bus conductor Brian Souter and his sister Ann Gloag, Stagecoach trailblazed into rail networks and international markets. A slow retreat into the low-margin British bus business was accompanied by a declining share price.

Last year’s collapse in passenger traffic and the growing need for green investment is reflected in this defensive stock-based combination. The terms give Stagecoach shareholders just under a quarter of the combined group. 

Desperate times call for desperate measures. Souter and Gloag, who have a quarter of the equity, have agreed to the deal. But Stagecoach shareholders should think hard before throwing in their shares at the offer price.

National Express is offering 0.36 shares per Stagecoach share, representing a 20 per cent premium to the undisturbed share price from September. That values Stagecoach at just under eight times 2023 earnings. In the 15 years prior to the start of the pandemic, they traded at an average of 10 times forward earnings. National Express shares still trade at that level.

The combined group will generate cost savings of £35m annually after two years. Tax and capitalised, those are worth nearly £300m or about three times the value of the premium on offer. This suggests National Express can pay more.

How much more? On current ebitda estimates for 2023, Stagecoach’s share rises to 29 per cent of the combined group total. An equivalent share of the combined equity pushes the offer price up by 16 per cent at current prices. 

If you are broken down on the roadside, it is tempting to hop aboard the first serviceable vehicle that stops for you. But when the bus doors close behind them, Stagecoach investors will no longer be able to ask for a better deal.

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