Is stagecoach back on track?

Recent results suggest that the public transport giant has left its troubles behind
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The Independent Online

Twenty-eight years ago, a brother and sister set up a bus service in Perth that ran two coaches to London. Those two coaches expanded into Stagecoach Group, at one time the biggest bus company in the world and a watchword for Thatcherite capitalism. The next step was international expansion, and that was where the wheels fell off.

Six years on from the company's nadir, where its shares hovered around 10p and rumours it was on the verge of going bust, it has fought back to surpass its peak at the turn of the century. One analyst yesterday called the group the "shining light" of the public transport sector after it announced a strong set of results.

Stagecoach's storming rise in the 1980s was described as "a classic rags-to-riches tale from the frontiers of capitalism" by Christian Wolmar in his book Stagecoach, published in 1998. It was masterminded by Brian Souter, a former bus conductor and accountant, who launched the company in 1980 with his sister Ann Gloag using their father's redundancy money.

Through a strong knowledge of the industry and following the wave of privatisation and subsequent fragmentation of the market after the Transport Act 1980 it build a significant presence in the market. By 1992 it had expanded into rail operations with the shortlived Stagecoach Rail. Its use of the system and aggressive tactics weren't always appreciated. Mr Wolmar said: "Through press coverage of Monopolies and Mergers Commission referrals and reports, Stagecoach became notorious, an emblem of the excesses of Thatcherism."

When the time came to list on the London Stock Exchange in April 1993, investors clamoured to get their hands on the stock, with the float coming in seven times oversubscribed. It listed at 23p per share, valuing the group at £134m, and over the next six years stormed to a peak of 284p in 1998.

One sector expert said: "In the late 1990s all the public transport groups thought the UK had gone ex-growth. There had been huge consolidation, and everyone began looking abroad."

National Express, Arriva and Stagecoach all looked to North America. Stagecoach bought Coach USA, the country's biggest operator, in June 1999 for $1.2bn, creating the biggest bus operator in the world. Mike Kinski, who had taken over as Stagecoach's chief executive the previous year (Mr Souter had become chairman), said at the time of the deal: "We see this as a $40bn market potential."

The move proved disastrous, as over the next three years it had to issue four profit warnings, primarily relating to the US business, which sent its shares spiralling to 10p. This sparked speculation that it was in danger of breaching its banking covenants, which was hotly denied at the time by the financial director, Martin Griffiths, and subsequently proved inaccurate.

The transport analyst said: "Coach USA was not a good buy. It was a lower-quality business and had serious problems. They bought the wrong business, and added to that it was just coming into a recession in the US." The business was also smashed by the terrorist attacks of 2001.

"In late 2000, the market thought were problems at the company, but no one realised how serious and deep-seated they were. They realised extensive surgery was needed."

Several months prior to the fourth profit warning, it launched a full-scale inquiry into its US operation and Mr Kinski's successor, Keith Cochrane, parted ways with the company. "There was the impression that he had tried everything and it justwasn't working," one source said. The company brought Mr Souter back, and the rebuilding process had the share price peaking at record levels late last year at 291.5p. One company insider said it had adopted a "back-to-basics" strategy to rebuild its business. Mr Griffiths, who remains the financial director, said yesterday: "The company made a poor acquisition in the US, it didn't meet our expectations. I was always confident we could come through it, but it was a painful process."

Under Mr Souter, Stagecoach sold down or restructured 70 per cent of the US operation, keeping only the most profitable businesses. But essentially it was refocusing on the UK. The group also sold down a business in New Zealand and its interests in Hong Kong. Then, two years ago, the Australian investment house Macquarie offered £263.6m for Stagecoach's London Bus division, which signalled the end of its interest in operating buses in the capital.

The analyst said: "They focused on core UK operations and set about working out how to stimulate growth and exit the unprofitable US businesses. The market perceptions are of a very good management team, and of course shareholders are happy because of the huge amounts returned to them."

Last year, rather than targeting another expensive foreign acquisition, Stagecoach returned £700m to shareholders (including Mr Souter and his sister, who still own about 25 per cent of the company between them). This followed a £250m return several years earlier, but the size surprised analysts and investors alike. "The share price has continued to rise as the market can see it is a cash-generative business and it is happy to return money to investors," the analyst said. Over the past five years the company has also halved its almost £1bn of debt on the balance sheet.

The group has been helped by the sector, which is not particularly cyclical; people will always need transport to travel to work, as well as the children using buses for school and pensioners who travel regularly to hospital. Mr Griffiths added: "The macro environment for public transport is good. People are more concerned about the environment and congestion on the roads is increasing. There is also a wave of inward migration from countries in Eastern Europe which are very comfortable with public transport."

Stagecoach's shares yesterday jumped over 7 per cent to 240.5p after it reported that its performance since the end of October had hit the top end of management forecasts.

Its UK rail business stood out, with like-for-like revenue growing 14 per cent in the nine months to 3 February. These numbers also did not include East Midlands Trains, the franchise it took over on 11 November. Elsewhere in its rail portfolio, its operation with Virgin rose 12.4 per cent. The group's UK bus operation rose 7.4 per cent, while passenger volumes on its buses grew 2.5 per cent.

The management believes that the outlook remains positive despite caution over the wider economy, particularly with the impact of rising fuel prices, although much of that is hedged.

Mr Griffiths said: "The numbers are good, and we are reassured by the continued rise in revenues. The strategy has been very clear in the past four years. We are focused, but also opportunistic, and looking at bolt-on acquisitions. As for another multibillion-dollar deal; we never say never, but at the moment we are comfortable."

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