ii view: Stagecoach shares surge as National Express bid approach confirmed

A proposed all-share takeover by National Express would generate cost savings. We assess prospects.  

Potential Stagecoach takeover by National Express

• 0.36 new National Express ordinary shares for each one ordinary Stagecoach share

ii round-up:

UK bus operator Stagecoach (LSE:SGC) today confirmed press speculation regarding takeover talks with rival UK and overseas transport operator National Express (LSE:NEX). 

Under the potential takeover, Stagecoach shareholders would receive 0.36 new National Express shares for every Stagecoach share held, resulting in them owning around 25% of the combined group. 

Stagecoach shares rose by more than 20% in UK trading. Shares for National Express gained by more than 7%. Both were already up by around 85% over the last year prior to this latest news, following a slow lifting of pandemic restrictions and a partial return of passengers to their services. 

National Express had to date identified pre-tax cost synergies that are expected to reach a run-rate of at least £35 million, with approximately 25% achieved by the end of the first year, 85% by the end of the second year and full run rate by the end of the third year following completion of the potential combination.

Management at both companies believe that the potential combination would be a strategically compelling proposition, with significant growth and cost synergies, as well as delivering strong value creation for both sets of shareholders.

Of the identified cost savings, one-third are expected to come from network efficiencies and optimisation, another third from shared best practices including enhanced scheduling and reduced mileage, and the remainder from additional cost savings including rationalisation of duplicate costs. 

Ignacio Garat and Chris Davies of National Express would become chief executive and chief financial officer respectively of the combined group. 

ii view:

Scotland headquartered Stagecoach operates bus, coach and tram services only in the UK. Its services are mostly regional, with some London operations. National Express, a bigger company, operates bus, coach and train services across several countries. The US and the provision of both school buses and coaches is its biggest market, accounting for around two-fifths of sales. Its ALSA coach services in Spain comes next at close to a quarter of sales, with UK services generating around one-fifth of revenues. Its Rhine-Münster train express in Germany follows at around 7% of sales, with Morocco, Canada and Switzerland making up the balance.  

For investors, regulatory concerns may need to be faced. A still clouded Covid outlook remains for both Stagecoach and National Express. Passenger numbers are yet to recover to pre-pandemic levels and some commuters may never return to the office given new work from home practices.

That said, the relatively small overlap of only UK services may see regulators giving the proposed deal the green light. Cost savings would help combat Covid hindered revenues, while government requirements to reduce energy use under climate change concerns point to the benefits of shared public transport. For now, and while the proposed deal is still at an early stage, the likely benefits of a possible tie-up look favourable long term for shareholders of each company.  

Positives: 

• Cost savings
• Potential beneficiary of climate change initiatives

Negatives:

• Ongoing Covid uncertainty
• Possible regulatory hurdles

The average rating of stock market analysts:

Buy