The opportunistic move faces many hurdles, including potential opposition from the Takeover Panel. Stagecoach was part of a private-equity consortium that walked away from a £765m bid for National Express last Friday.

Stagecoach had been the junior partner in the consortium, which included CVC and National Express’s biggest investor, Spain’s Cosmen family.

The failure of the discussions, which wiped 23% off the stock-market value of National Express, mean that under UK takeover rules, Stagecoach cannot make another bid for six months unless Souter receives the blessing of the board.

National Express is the smaller of the two companies with a market value of £553m. John Devaney, chairman of National Express, will consider a merger only if there is a solution to competition problems and if his investors get a sufficient share of the combined group.

On Friday National Express insisted that it had a strong future as an independent listed company. Ray O’Toole, the company’s chief operating officer, told reporters: “This is a fantastic business. We are going back to Plan A, with the rights issue. This bid was never a 100% slam dunk.”

According to those familiar with the company, Devaney intends to press ahead with plans to repair its balance sheet with a £400m heavily discounted rights issue. He will continue talks with investors this week over the terms of the cash call.

His group is hampered by a debt mountain of about £1 billion, which was accumulated during a spending spree that included its bid for the east coast rail franchise in 2007.

Transport analysts say that if takeover talks begin, then First Group, which had a merger proposal declined earlier this summer, will consider returning with another offer.

National Express became a takeover target in the summer after warning that the east coast rail line between London and Scotland was running out of cash. When it became clear the company had vastly overpaid for the franchise, chief executive Richard Bowker quit and the government said it would nationalise the route.

The Cosmen family was due to acquire the company’s bus operations in Spain as part of the recent bid consortium and may favour Stagecoach’s plans over the proposed rights issue.

Analysts say that a combined National Express/Stagecoach business would be able to generate considerable cost savings and synergies, including in North America.

See also:

Stagecoach in merger proposal to National Express

Reuters: Oct 18, 2009

LONDON - British bus and rail group Stagecoach confirmed on Sunday it had approached rival National Express about a possible merger.

The confirmation followed a report about the planned all-share merger in The Sunday Telegraph newspaper, which valued the potential deal at 1.65 billion pounds ($2.7 billion).

In a statement, Stagecoach said that "at the invitation of the National Express board," on October 16, it sent a letter indicating the terms under which it would be prepared to enter into talks about a merger of the two companies.

The approach follows the Friday collapse of takeover talks between National Express and a consortium led by Spain's Cosmen family.

Stagecoach had made a deal with the consortium to buy National Express's UK bus and rail operations if the offer succeeded.

In a separate statement on Sunday, National Express said it had received a "highly preliminary" proposal from Stagecoach that would leave National Express shareholders owning no more than 40 percent of the combined group's stock.

National Express added it would consider the Stagecoach approach but continue to explore an equity fund-raising, "in order to see whether the Stagecoach proposal offers greater value and certainty to National Express shareholders."

In addition, National Express said it had not received a fresh proposal from British transport group FirstGroup, which proposed an all-share merger with National Express in June, but walked away in July.

National Express is due to issue an interim management statement on Thursday.