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National Express (NEX.L) Suffers Government's Wrath
National Express Group provides travel services in the UK, US and Spain. The company’s main focus remains its UK operations which this week fell under the spotlight on news the government intends to re-nationalise the East Coast mainline franchise. The high profile route cost National Express a hefty £1.4bn at the peak of the economic cycle, in 2007, only to prove loss-making, post acquisition. The two opposing statements released by the Department for Transport (DfT) and the company articulate polar-opposite arguments and are worrying for long suffering rail commuters. The episode is also a damning indictment of rail privatisation, robust in theory, but flawed in practice. The privatisation of the regional franchises was not designed to allow private companies to retain cash-cow profitable routes yet, allegedly, have a ready-made exit strategy on routes that fail to add shareholder value.
Before progressing onto the carefully worded excuse provided by the profit seeking National Express Group, let’s review key aspects of the DfT statement. The Department for Transport wrote, National Express “will not provide the further financial support necessary to ensure that their subsidiary, National Express East Coast, remains solvent.” The DfT also stated “It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging”. I can’t imagine many commuters or tax-payers disagree. The government has created a new public entity to formally take control of the franchise if and when the National Express East Coast franchise ceases to operate. Operational staff and assets will be transferred and services will be unaffected. Of particular interest was the DfT suggestion that “the Government believes it may have grounds to terminate” National Express’s East Anglia franchise, a route I know intimately well, unfortunately.
National Express, needless to say, views the situation differently and announced prior to the DfT statement: “In the event that the Secretary of State for Transport reassumes control of the East Coast franchise, National Express would work with the DfT to ensure an orderly handover and ensure that passengers, services and employees are unaffected. The Group does not expect that such circumstances would result in cross default of the Group's other rail franchises.” NEX cited rising fuel and pension costs and a shortfall relative to the 9-10% passenger revenue growth, per annum, budgeted into their original acquisition plan. The first six months of 2009 provided revenue growth of approximately 1%. Fairing better, the East Anglia franchise enjoyed underlying growth of 5% during the same period.
Clearly NEX wouldn’t be digging its heels in on a whim and has secured what it refers to as, “high quality” legal advice. Following consultation with its lawyers, the firm was sufficiently confident to state “Under the DfT's model for franchise bidding, the Group's financial obligations under the East Coast franchise are strictly limited. National Express is not a party to, or a guarantor of, National Express’s East Coast obligations under the East Coast franchise agreement.”
The issue will no doubt fester on for weeks and months now expensive, err, I mean high quality lawyers are involved, but the government must be tempted to go for the NEX jugular in the knowledge many tax-payers, and millions of rail commuters, remain staunchly anti-big business following the banking fiasco.
Only rumours that National Express remains a bid target saved the stock from a bigger beating on Wednesday (8% lower). Looking forward, the stock is worth watching and is most definitely a potential near-term shorting opportunity. Personally, I will review my sell rating on the stock when I get manage to get a seat on the 07.03 to London Liverpool Street. Don’t hold your breath.
Sources: NEX statement DfT statement
Before progressing onto the carefully worded excuse provided by the profit seeking National Express Group, let’s review key aspects of the DfT statement. The Department for Transport wrote, National Express “will not provide the further financial support necessary to ensure that their subsidiary, National Express East Coast, remains solvent.” The DfT also stated “It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging”. I can’t imagine many commuters or tax-payers disagree. The government has created a new public entity to formally take control of the franchise if and when the National Express East Coast franchise ceases to operate. Operational staff and assets will be transferred and services will be unaffected. Of particular interest was the DfT suggestion that “the Government believes it may have grounds to terminate” National Express’s East Anglia franchise, a route I know intimately well, unfortunately.
National Express, needless to say, views the situation differently and announced prior to the DfT statement: “In the event that the Secretary of State for Transport reassumes control of the East Coast franchise, National Express would work with the DfT to ensure an orderly handover and ensure that passengers, services and employees are unaffected. The Group does not expect that such circumstances would result in cross default of the Group's other rail franchises.” NEX cited rising fuel and pension costs and a shortfall relative to the 9-10% passenger revenue growth, per annum, budgeted into their original acquisition plan. The first six months of 2009 provided revenue growth of approximately 1%. Fairing better, the East Anglia franchise enjoyed underlying growth of 5% during the same period.
Clearly NEX wouldn’t be digging its heels in on a whim and has secured what it refers to as, “high quality” legal advice. Following consultation with its lawyers, the firm was sufficiently confident to state “Under the DfT's model for franchise bidding, the Group's financial obligations under the East Coast franchise are strictly limited. National Express is not a party to, or a guarantor of, National Express’s East Coast obligations under the East Coast franchise agreement.”
The issue will no doubt fester on for weeks and months now expensive, err, I mean high quality lawyers are involved, but the government must be tempted to go for the NEX jugular in the knowledge many tax-payers, and millions of rail commuters, remain staunchly anti-big business following the banking fiasco.
Only rumours that National Express remains a bid target saved the stock from a bigger beating on Wednesday (8% lower). Looking forward, the stock is worth watching and is most definitely a potential near-term shorting opportunity. Personally, I will review my sell rating on the stock when I get manage to get a seat on the 07.03 to London Liverpool Street. Don’t hold your breath.
Sources: NEX statement DfT statement
Tags: dft, equities, express, national, nex, rail, transport, uk
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