FirstGroup shareholders’ revolt escalates over the sale of a bus business in the United States

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SAN FRANCISCO, CALIFORNIA – September 13, 2018: A first student school bus picks up students in San Francisco, California. First Student Inc. is the leading provider of school bus transportation in North America.

Robert Alexander / Getty Images

LONDON – British transport multinational FirstGroup faces a shareholder rebellion over the sale of its two US bus companies – one of which operates the iconic yellow school buses – to Swedish private equity firm EQT.

The two major shareholders of the Aberdeen-based company, Coast Capital and Schroders, have announced public opposition to the $ 4.6 billion sale of First Student, the largest school bus operator in the United States, and outsourced public transport provider First Transit to EQT Infrastructure.

Glass Lewis, one of the world’s largest shareholder proxy advisers, will also vote against the deal at FirstGroup’s annual general meeting on May 27, citing “poor transaction timing and inadequate valuation.”

Coast Capital CIO James Rasteh told CNBC on Friday that it would be “very irresponsible to vote in favor of this transaction”, which he said represents “a net destruction of value”.

Both businesses make up a significant majority of FirstGroup’s global revenue, but the company has instead chosen to focus on its UK bus and train business, as well as the sale of the US Greyhound intercity bus service. .

Coast Capital owns a 14% stake in FirstGroup while Schroders owns 12%, according to data from Refinitiv. The company’s third shareholder, Columbia Threadneedle, supported the sale of EQT, alongside proxy advisory firms ISS, IVIS and PIRC.

The backlash centers on FirstGroup’s rejection of other proposals to sell its US operations. According to two prominent banking sources familiar with the process, who wished to remain anonymous because of their professional reputation, an alternative proposal would have potentially given shareholders higher long-term returns than the proposed deal with the Swedish private equity firm. EQT.

A late April email from sales consultant JPMorgan Cazenove to senior executives at FirstGroup, including CEO Matthew Gregory, seen by CNBC, discusses a proposed $ 4.7 billion acquisition of U.S. companies, which according to reports. sources, came from the Special Purpose Acquisition Company (SPAC) division of UBS.

Sources say the deal would have allowed the two companies to register as a U.S. corporation, with current shareholders retaining their stake and retaining the value created by the sale. The EQT offering is characterized in the email as being worth $ 4.5 billion with around $ 1.17 billion in deductibles.

JPMorgan representative Cazenove, who advised on the sale of EQT infrastructure alongside Rothschild & Co. and Goldman Sachs, explains that Coast Capital will likely perceive the proposal as “probably at least 25% more attractive than the EQT offering” , although the representative does not. does not confirm that it is worth 25% more. The email also adds that Coast Capital “will want to feel that we looked at it with an open mind and weren’t too quick to dismiss it.”

FirstGroup Response

In a statement Friday, FirstGroup accused Coast of relying on an EBITDA (earnings before interest, taxes, depreciation and amortization) figure “clearly misleading” due to errors in accounting for exchange rates, supplementing price (future compensation of the company’s salespeople based on financial performance or future sale), working capital and deferred capital expenditures. The company also attacked multiple and comparable comparisons of the hedge fund’s book value.

Coast Capital released its own lengthy response to the allegations in a statement Monday, alleging multiple inaccuracies in FirstGroup’s representation of the numbers and claiming that the company had attempted “to use accounting tactics to try to cover up the glaring shortcomings and the exceptionally low evaluation of this offer.
place on the most valuable assets of shareholders. “

“The board of directors does not seem to understand either that these companies could benefit from significant federal subsidies and from a reopening and a rebound of the American economy”, he added.

FirstGroup reiterated that it was engaged in a “full and competitive selling process,” which included more than 40 bidders, and said all of Coast Capital’s multi-year proposals had been carefully considered.

CINCINNATI – July 22: FirstGroup America Headquarters, photographed from the Carew Tower Observatory Deck in Cincinnati, Ohio on July 22, 2017.

Raymond Boyd / Getty Images

FirstGroup cited a earn-out structure for First Transit in which the company will receive 62.5% of the value of First Transit above $ 380 million “either on the third anniversary of the sale or sooner if Transit is sold to a third”.

“When I joined the board in August 2019, I made it clear that my goal was to unlock value within the group,” FirstGroup president David Martin said on Friday.

“After a comprehensive strategic review, we have embarked on a comprehensive and well-publicized sales process, which achieves total value and enables the Group to return shareholder value, meet its legacy challenges and strengthen its position for the future.

Coast Capital has disputed this, saying that if EQT does not sell the company for a higher value within three years, a complicated arbitrage process will likely follow as the private equity firm and shareholders attempt to come to a conclusion. fair value of equity for the business.

“We are certainly happy to include the earn-out as part of the multiple if they’ve paid for it up front,” said Chad Tappendorf, partner of Coast Capital. “But it is not, and it is not at all market practice to include something that is uncertain in a title multiple.”

When management first announced the sale with their representation of the value it generated, FirstGroup’s share price rose 17% to an intraday high of 101.30p on April 23, 2021. However, Tappendorf noted that shareholders reviewed the presentation and began to question the value placed by the company, with the share price falling around 27% to 73.10 pence over the next two weeks. .

The two leading banking sources claimed that having started the process before the Covid-19 crisis, FirstGroup refused to consider options beyond the EQT deal, having entered into a “no-sell clause” with the Swedish private equity firm before announcing the intention to sell the business.

“The decisions they made 18 months ago were the right decisions, but they haven’t updated those decisions for the New World,” a source said.

“For the process they performed, it was a reasonable price, but the process was not the right process.”

In his vote recommendation report, however, shareholder proxy advisor ISS noted that if the no-sale clause prevents the board from “recruiting, soliciting or encouraging potential bidders” to make a competing bid, it would be allowed to do so. to consider an “unsolicited competing proposal” as long as it has been received before the resolution is approved by shareholders and constitutes a “superior offer”.

Another source, an independent expert in transatlantic mergers and acquisitions with first-hand knowledge of the sale process, who preferred to remain anonymous due to business sensitivities, told CNBC that “the lack of fairness opinions suggests that in the rush to close this deal, the management of FirstGroup stumbled – a bad deal. “

A fairness opinion is a summary letter prepared by an investment bank or independent professional third party determining whether the terms and finances of a merger or acquisition are fair.

“The lack of fairness opinions issued by an independent advisor, as well as the growing evidence obtained by Coast Capital that there are more attractive alternatives that continue to be ignored, is all evidence that a board of directors is not fulfilling its fiduciary responsibilities, ”Coast added in his statement on Monday.

Although no fairness opinion was given, FirstGroup was advised by three investment banks throughout the sale process.

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