Look for more deals on the buses

Investment Column
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The proposed £265m merger of the Badgerline Group and GRT to create FirstBus, Britain's second-biggest bus group, accelerates the trend to consolidation in the industry.

It comes hot on the heels of the £244m takeover of West Midlands Travel by National Express and a slew of acquisitions last year by the two companies involved in yesterday's marriage.

With Stagecoach, the market leader, having spent more than £100m since last May buying smaller rivals, it was no surprise that shares in the fifth-placed Go-Ahead shot up 15p to 191p yesterday.

The rationale is clear. Bigger turnover spells higher margins through increased purchasing power and improved operational gearing. Size also spells security. And since Badgerline is based in south-west England, while GRT is centred on north-east Scotland, the deal should escape scrutiny from the Monopolies and Mergers Commission. The City bought the strategy yesterday; Badgerline rose 5p to 138p, while GRT was up 13p to 269p.

But question marks remain over the deal. Badgerline shareholders will swap their current holdings for shares in the new company on a one-for- one basis. GRT holders get 1.9 shares in FirstBus for every one currently held.

The deal was cut on the basis of market capitalisation, with GRT shareholders gaining an equivalent 36 per cent share of the new company. But while managers are gaining increased turnover (and no doubt pay) many of the owners might argue that they are not receiving any premium for effective control by Badgerline, whose share price performance has been pedestrian by comparison - as the chart shows.

They will also end up with a company which has pro forma gearing of just under 200 per cent and are aligning themselves with management that has been prone to over-optimism in the past. In 1993 Badgerline plunged to losses of £930,000 after being forced to make a £7.8m write-down on a Bath property.

GRT proved its continuing out-performance yesterday, with estimated pre- tax profits for the year to March of £8m, up from £4.4m in 1993-94. A second interim dividend of 3p takes the total for last year to 4.4p.

Acquisitions added just £2.4m to the total, compared with £9.2m for Badgerline, which, before the Bath write-down, recorded profits up from £6.9m to £16.7m in the year to December.

But the real contrast is on margins, with GRT sporting 14.7 per cent on its continuing business, against 9.5 per cent for Badgerline. Those look decidedly limp against Stagecoach and WMT, which look to break through the 20 per cent mark soon. Moir Lockhead, the GRT chairman who becomes chief executive of FirstBus, is confident that margins in the combined group can be brought nearer to those in his own, while gearing should fall to nearer 150 per cent in the first year of the deal.

With annual purchases of £95m, FirstBus should be able to achieve cost savings, but the scope for profitable acquisitions is becoming more limited as prices are bid up. Shareholders - of whom around a fifth are still likely to be employees after the deal - might well find better value elsewhere.