A triple-whammy of bad news for FirstGroup today. First off, the firm announced an worryingly generous rights issue (more on that in a moment); second, the chairman, Martin Gilbert, resigned after 28 years in post; and third, pre-tax profits fell 87% to £37.2m last year. Oh, actually, there’s a fourth: net debt has risen 7.7% to almost £2bn in the year to the end of March. You could say things are dangerously close to coming off the rails.
So what’s this rights issue business about? Well, frankly, you know things are not going well when you have to resort to a rights issue. It is a way of raising cash by giving shareholders a favourable deal on discounted shares. It is popular with firms where money is tight. FirstGroup announced today that it is doing just that – giving shareholders a massive 62% off the quoted share price to get them buying more stock. The company called its report ‘Returning to Strength’, but guess what – shareholders are not stupid. The share price plummeted by 21% as soon as the news broke.
FirstGroup has had a bit of a shocker in the last year, having missed out on the West Coast mainline rail deal. Richard Branson’s Virgin managed to secure extra time on its own tenancy on the line after exposing a series of screw-ups by the civil servants handling the bidding for the franchise. For FirstGroup, this meant reassessing its strategy.
Last November, it said it would consider a new level for its full-year dividend in May 2013. ‘By that time, the prospects for our UK rail division are expected to be clearer, following independent reviews into the cancellation of the West Coast competition and the future of franchising,’ it said. Looks like ‘prospects’ are not what they were hoping for, eh?
To be fair, the rights issue could work in tandem with a couple of other things to improve the firm’s position. FirstGroup has cancelled its final dividend to ease pressure on its ailing balance sheet, and will soon complete the disposal of a load of assets for its bus business. The UK’s largest bus operator revealed last month that revenues from buses increased 2.4% in its final quarter (to the end of March). This marks acceleration since Q3, which saw 2.1% growth compared with the same period the previous year.
The figures made encouraging reading for shareholders because they show that the group’s ‘turnaround’ plan to make its bus business more profitable is yielding some results. Selling off eight of its London-based bus depots will raise around £80m and cut out a big swathe of its ongoing operating costs.
In the near term, the departing Gilbert says the focus is on maintaining the firm’s reputation in the stock market. He says the rights issue will ‘underpin the ability to remain a dividend paying stock as well as supporting our investment grade rating’. With such a bad morning’s news about FirstGroup, shareholders will be hoping his replacement - yet to be announced - can get things back on track…