National Express at £12.62 and FirstGroup 644.5p suffer falls of 33p and 21p, while Stagecoach eases 3p to 180p. Collins Stewart advises taking profits across the sector.

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U.K. Stocks Drop, Led by FirstGroup

Bloomberg: April 12

U.K. stocks fell, led by train operators including FirstGroup Plc after the Times newspaper said the government may consider bringing train services and rail tracks back under state control.

The FTSE 100 Index slid 32.0, or 0.5 percent, to 6381.3 as of 10:22 a.m. The FTSE All-Share Index decreased 0.5 percent to 3323.636. Ireland's ISEQ Overall Index fell 0.5 percent to 9507.51.

FirstGroup, the U.K.'s biggest train operator, lost 20.5 pence, or 3.1 percent, to 645. Rival National Express Group Plc slipped 28 pence, or 2.2 percent, to 1,267. Stagecoach Group Plc, a bus and rail operator, declined 2.75 pence, or 1.5 percent, to 181.

Scotland may become a test case for re-nationalization of the U.K.'s railways, and "secret talks'' have been held between Scottish politicians and Network Rail on taking over the train operations of First ScotRail, a unit of FirstGroup Plc, the Times reported today, without saying where it got the information.

The report is "absolutely ludicrous,'' said P.J. Taylor, a spokesman for London-based Network Rail.

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Network Rail Says U.K. Won't Resume Control of Trains

Bloomberg: April 12
By Tracy Alloway

Network Rail, the government-backed owner of Britain's railways, denied a report in the London-based Times newspaper that the company plans to bring train services and railways back under state control.

Scotland may become a test case for re-nationalization of the U.K.'s railways, and "secret talks'' have been held between Scottish politicians and Network Rail on taking over the train operations of First ScotRail, a unit of FirstGroup Plc, the Times reported today.

The report is "absolutely ludicrous,'' said P.J. Taylor, a spokesman for London-based Network Rail. "There have been absolutely no secret talks. We're happy with the current situation and we think the rest of the industry is as well.''

Network Rail took over the country's 21,000 miles of railway more than four years ago after its predecessor, Railtrack, was forced into bankruptcy by the government because of rising debt and poor performance. Train-operating companies such as FirstGroup, National Express Group Plc and Stagecoach pay Network Rail a government-regulated rate for using the tracks.

The Scottish Labour Party's election manifesto, published online and cited by the Times, says that operating rail lines in Scotland on "a not for profit basis needs to be fully examined'' in advance of the franchise's renewal.

'Absolutely No Plans'

"There are absolutely no plans to re-nationalize the railways,'' the party said in a statement today. "There have been no secret meetings, there is no truth in the substance'' of the article.

The U.K. government has ``no plans to change the structure of the rail network,'' the Department for Transport said in an e- mailed statement. "The current arrangements have given the railway the stability to deliver real improvements for passengers.''

Shares of FirstGroup fell as much as 24 pence, or 3.6 percent, to 641.5 pence and were down 2.6 percent at 648 pence as of 2:50 p.m. in London. The stock has risen 58 percent in the past 12 months, boosting the Aberdeen, Scotland-based company's market value to 2.82 billion pounds ($5.6 billion).

"For us, it's business as usual,'' said Rachael Borthwick, a spokeswoman for FirstGroup, in an interview. "We have a contract to run First ScotRail until 2011 with an option to extend after that and we've achieved an extraordinary amount since taking over.'' The company hadn't heard anything about a possible government takeover of railways until today, she said.

FirstGroup's Franchises

FirstGroup's Scottish rail-route franchise accounts for 95 percent of passenger train services within Scotland as well as services between major Scottish cities and London. The company's other train routes include First Capita Connect, operating commuter services within and around London, and First Great Western, which links the U.K. capital with Cardiff, Wales, and the English cities of Bath and Oxford.

"Any nationwide nationalization is unlikely to impact until the middle of the next decade and is likely to happen on a phased basis, as franchises expire,'' said Andrew Fitchie, an analyst at Collins Stewart in London, in a note to investors. The "threat of nationalization'' would be likely to ``turn off any hopes of private equity interest in the sector.''

Network Rail said last week it plans to invest 2.44 billion pounds to expand and improve the U.K.'s overcrowded train system. Passenger numbers on trains are at their highest levels in 60 years and 12 rail lines face ``significant capacity constraints,'' according to the company.

In 2004, 15 percent of passengers using trains during their morning commute were unable to find seats, according to Network Rail. Areas around Edinburgh and London are especially crowded, the company said.