National Express has become a takeover target following its admission that its £977m debt burden is unsustainable. Photograph: National Express

National Express's costly exit from the £1.4bn East Coast rail franchise dragged the public transport group into the red over the first half, with pre-tax losses of £48.1m.

The bus, coach and rail operator has become a takeover target in recent weeks following the planned abandonment of the London-to-Edinburgh route, the resignation of its chief executive and the admission that its £977m debt burden is unsustainable. Those problems weighed heavily on first half results as National Express posted a pre-tax loss of £48.1m for the six months to 30 June, against a profit of £52.4m for the same period last year. The group took a £54.7m hit from the restructuring of its rail businesses in anticipation of handing back the East Coast contract later this year.

Today's results come as hundreds of thousands of rail passengers face disruption as National Express East Anglia workers go on strike.

National Express's debt burden, accumulated by a spending spree that saw it become a leading player in the Spanish coach market, was reduced by more than £200m to £977m over the period, but it is still fighting to avoid a covenant breach and National Express said this morning that it will scrap its dividend until borrowings are reduced further.

Jez Maiden, finance director, said the group would consider a rights issue or disposals as it strives to meet a covenant test in December that limits the group's borrowings to no more than 3.5 times its earnings before interest, tax, depreciation and amortisation. The multiple currently stands at 3.2 following concerted work on costs since January, the group said today, but analysts still believe a cash call is highly likely. "We will continue to look at other opportunities and options including equity and other disposals. But we have made no decisions," he said.

National Express said it was still awaiting an update from the consortium that made an all-cash approach for the group last week. The group's largest shareholder, the Cosmen family, and private equity firm CVC have linked their interest to a number of preconditions, including a demand that National Express retains its remaining two franchises. Maiden said National Express was seeking clarification on what he called a "complex" approach. "We are evaluating what we received and going through a number of questions that have arisen from what is quite a complex and conditional interest. But at this point it is too early to say what the result of the evaluation will be." National Express also declined to comment on the interest of Stagecoach, a rival public transport operator, which is also in talks with the bid consortium about picking up National Express assets as part of the deal.

National Express reiterated that, according to its lawyers, the government has no right to strip it of its profitable c2c and National Express East Anglia franchises under so-called "cross default" guidelines. "The group would oppose any such attempt," it said. However, National Express indicated that rail will be a lesser priority in the years to come as it told investors that it will focus on its "core divisions" of coach and bus. Rail remains the group's biggest earner by revenue, accounting for 44% of turnover, but it is now the least profitable division – accounting for just 3% of operating profit over the period.

The outlook for its rail businesses remains poor, the group said today. Underlying revenue at its three franchises rose by just 1%, with growth "markedly lower" than previous periods as the recession saw fewer journeys and, most damagingly for East Coast, a trend of passengers switching to cheaper pre-book and standard-class tickets. As a result, the East Coast franchise lost £20m between January and June. In a dig at the Department for Transport, which has refused to renegotiate the East Coast contract, National Express said it had limited ability to cut costs on the route because the DfT had written such tight specifications into the deal. "National Express East Coast is expected to remain loss-making for some time," said the group. It added: "This has been a common problem across all the country's long-distance franchises, where the impact of falling GDP on business and discretionary travel behaviour is felt earlier and more acutely than on commuter-orientated franchises."

National Express also owns a coach and bus operation in the UK and a school bus division in the US. Total group revenues rose 4.4% to £1.4bn over the period, with all divisions affected by the recession. The operating profit at UK bus and coach fell by 21% to £21.8m, with rail just scratching out £2.5m thanks to East Anglia and c2c, while the Spanish coach business saw profits fall by £3m to £28.6m and the school bus division reported a fall in profits from £25.9m to £24.7m.

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UPDATE: National Express Swings To 1H Loss, Scraps Dividend

DOW JONES NEWSWIRES: JULY 30, 2009
By Kaveri Niththyananthan

LONDON (Dow Jones)--U.K.-based transport group National Express Group PLC (NEX.LN), the subject of takeover attempts, Thursday said it was suspending its interim dividend payment after it swung to a first-half pretax loss due to losses at its East Coast rail franchise in the U.K.

The bus and rail company, which was earlier this month stripped of the franchise by the U.K. government, booked GBP20 million of losses at East Coast and said it would stop running the franchise during the second-half of the year. It will then focus on its bus and coach operations in the U.K., Spain and North America.

The company said it still hasn't found a replacement for Chief Executive Richard Bowker, who announced his departure on the same day the U.K Government said it would take control of East Coast.

Takeover interest in National Express has been prompted by a 60% collapse in the company's share price in the past year. The company is on an unstable financial footing, having built up large debts just as the recession took hold in the U.K.

It booked a pretax loss for the six months to June 30 of GBP48.1 million, compared with a profit of GBP52.4 million in the same period a year earlier. Revenue fell 4.4% to GBP1.42 billion, from GBP1.36 billion, while its net loss was GBP36.8 million, from a GBP35.7 million net profit a year earlier.

Private equity group CVC Capital Partners and members of Spain's Cosmen family, the largest shareholder in National Express with an 18.7% stake, have made an indicative proposal to buy the company. Rival Stagecoach Group PLC (SGC.LN) has also said that it is in exclusive talks to buy some National Express assets should a bid for the U.K. transport operator prove successful.

National Express' own strategy is focused on reducing debt, strengthening its balance sheet and cutting costs. It said it is on target to deliver GBP40 million in annual savings.

Jez Maiden, Group Financial Director, told reporters the company is looking at reducing its debt position and options include equity fund raising and a further disposal of assets.

The interim dividend won't be paid so the company can focus on debt reduction. It has already reduced net debt by GBP200 million since the start of the year by reducing capital investment by 40% and improving working capital. At June 30, net debt was GBP977.5 million.

Maiden gave no details on how negotiations were developing with CVC Capital, only adding National Express is evaluating its options.

Earlier this month, the U.K. government said it would strip National Express of its East Coast rail franchise because it couldn't support it financially.

At 0727 GMT, National Express shares were down 3 pence, or 1%, at 337 pence.

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National Express heads for the buffers

Reuters: July 30th, 2009
Neil Collins

You might have thought that the Spanish had learned from observation that British transport businesses are much riskier than they look. Ferrovial’s purchase of airports operator BAA has turned into a financial plane crash, but perhaps it’s the hope of clawing back some of its paper losses on National Express that has encouraged their fellow Spaniards in the Cosmen family to consider buying the whole business.

National Express is barely sustainable in its current form. It has infuriated the British government by walking away from a big rail franchise when it couldn’t sustain the price it had recently agreed to pay. As a result, it faces the prospect of having to fight to hold onto the other two, in the knowledge that these are the last it will ever get.

On Thursday it scrapped the dividend and the directors added that there was “significant doubt” about the company’s ability to continue as a going concern. They are having to struggle on without the wisdom of Richard Bowker, who as chief executive drove them into this rusty siding, and a share price that went from 10 pounds to 3 pounds during his three years at the controls.

There’s a curiously binary outlook now. An inciteful analysis from Pali International can’t see any value for a bidder paying more than the current 344 pence, since that implies an unattractive internal rate of return of around 17 percent. Even that assumes a new owner can persuade the government to view the company as a bona-fide owner of rail franchises again. Brian Souter at rival Stagecoach is keen to buy bits of the business, but he’s not known for over-paying, and there have been no talks. As Pali concludes; “We would not regard 300p as a floor if [the bidding consortium] walks.”

National Express used to be a decent, if rather dull, business running long-distance buses. As so many others have done, its board was seduced by the idea that a dependable cash flow was crying out for a “more efficient” (ie debt-laden) balance sheet. The shareholders know better now. It’s no wonder the Spanish are cross enough to try and take it away.

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Debt threatens to derail National Express fight against takeover bid

The Times: July 31, 2009
Helen Power, David Robertson

The heavily indebted company must refinance £460 million of debt by September 2010 and faces more stringent loan covenant tests

Takeover target National Express warned yesterday that there was a “material uncertainty” about the transport group’s ability to continue as a going concern, adding to the pressure to sell the business.

The heavily indebted company, which is fighting a £500 million bid from CVC, the private equity house, and Spain’s Cosmen family, must refinance £460 million of debt by September next year and faces more stringent covenant tests on its loan from this December.

However, National Express’s management said: “We have a reasonable expectation the group has adequate resources to continue in operation.”

The company has £373 million of undrawn funds in its bank account and said it continued to consider an equity raising and disposals to help to shore up its battered balance sheet.

It has obtained a temporary waiver from lenders, relaxing its net debt covenant, but from December it must keep borrowings below 3.5 times earnings before interest, tax and depreciation (ebitda), tighter than the current level of four times ebitda.

National Express said yesterday that borrowings stood at just 3.2 times ebitda, but conceded that “covenant compliance remains dependent on actions which are yet to be delivered”.

The group plunged into the red in the first six months of the year when it was forced to write off £54.7 million after being stripped of its loss-making East Coast Mainline franchise.

The company, which made a £36.6 million loss compared with a profit of £35.9 million last year, also announced that it would axe its interim dividend to save cash and reduce debt.

National Express said the move should help it to stay within its banking covenants and assist with refinancing €540 million (£461 million) of debt by next year. Cost-cutting in the first half has already reduced debt by £200 million to £977.5 million.

Ray O’Toole, the chief operating officer, said he was encouraged by recent fundraising at other companies and believed National Express’s banks and other investors were supportive.

The move to strip National Express of the East Coast franchise prompted a flurry of interest from potential bidders for the bus and trains group.

Stagecoach has also thrown its hat into the ring, saying that it was in exclusive talks with CVC about joining its consortium with a view to breaking up National Express, and has also reserved the right to make its own bid. Stagecoach is thought to be most interested in its rival’s bus operations.

The CVC consortium is believed to have offered about £500 million for the company, but National Express’s management is holding out for a minimum of 400p a share, which would value it at about £620 million.

In a note yesterday Cazenove analysts said they believed the fair value for National Express was between 400p and 530p and that a bid would have to be at a premium of 5 per cent to 10 per cent of 400p to be successful.