Stagecoach shares dive 42% on bus operations warning

Shares in Stagecoach, the bus, rail and airport operator, crashed 42 per cent yesterday after the group warned that rising cost pressures in its UK and US bus operations would hit profits next year.

The warning sent Stagecoach shares tumbling 51.25p to close at a four-year low of 70.25p and prompted fresh questions about the group's £1bn acquisition of Coach USA last year.

Stagecoach also cautioned that reduced subsidies for South West Trains would have an impact, and said it was writing down the value of Prestwick airport after losing its biggest freight customer, Federal Express.

The simultaneous announcement that Stagecoach is to sell its train-leasing business, Porterbrook, to Abbey National in a £1.4bn deal and return £250m to investors through a share buyback was not enough to soothe market worries.

Only six weeks ago Stagecoach insisted there were "no black holes" in its acquisition of the US bus operator after announcing the shock departure of its chief executive Mike Kinski and Larry King, chief executive of Coach USA.

But yesterday the group admitted that rising fuel and labour costs at Coach USA would more than cancel out revenue growth. "There are cost pressures at Coach USA which look more significant now," said Keith Cochrane, Stagecoach's new chief executive.

Mr Cochrane also said that profits in the group's core UK bus operations would remain flat because of wage pressures, high rates of staff turnover and lack of passenger growth.

The sale of Porterbrook, which Stagecoach bought for £830m in 1996, would be "significantly earnings dilutive" the group said. Last year Porterbrook contributed pre-tax profits of £109m on turnover of £270m. Abbey National is paying £773m in cash and assuming £669m of Porterbrook debts and leasing commitments. After a goodwill write-off of £276m, Stagecoach will make a gain of £391m on the deal.

Mr Cochrane said the proceeds would be used principally to reduce Stagecoach's borrowings, which stood at £1.55bn at the half-year, leaving it with gearing of 35-40 per cent.

He said that although Porterbrook had been "an outstanding success", Stagecoach could not longer afford the high levels of investment in rolling stock that would be needed when train-operating companies were awarded longer rail franchises.

Mr Cochrane said that required the "deep pockets and greater resources" of a bank. The other two train-leasing companies, Angel Trains and Eversholt, are already owned by Royal Bank of Scotland and HSBC respectively.

Faced with higher costs in its rail and bus businesses and reduced subsidies at South West Trains, Stagecoach aid it planned to concentrate on initiatives to increase revenues.

But Mr Cochrane said this did not mean the end of Stagecoach's aggressive expansion that has seen it acquire 27 businesses in the last 20 years. Stagecoach said it would continue to look for acquisitions while the integration strategy being carried out across the group would provide a platform for growth in the medium term.

Standard and Poor's, the ratings agency, cut the rating on Stagecoach's debt from triple B plus to triple B.