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FirstGroup is looking to strike deals to carve out new train routes and expand its bus business as the UK’s largest rail operator reshapes in response to the UK government’s renationalisation of the railways.
Graham Sutherland, chief executive of the FTSE 250 company, told the Financial Times that his “key focus” has been “diversification” since Labour won power and began to cut out the private sector from the vast majority of the UK railway.
FirstGroup’s South Western Railway will be the first train operator to be taken over by the government in May, and its other two government-contracted train companies will follow by the end of this parliament.
The government-contracted train businesses accounted for 27 per cent of FirstGroup’s adjusted net profits of £51.8mn in the first half of its current financial year.
Sutherland’s response has been to expand into the one area of rail which Labour has promised to leave to the private sector: so-called “open access” operators which are not part of the main network.
These smaller operators are privately run, and pay to run trains on the public rail lines on routes judged by the rail regulator not to compete with established train companies.
“Our strategy to deal with nationalisation was to go long on open access and invest into it,” Sutherland said.
FirstGroup already runs two open access services, Lumo between London and Scotland, and Hull Trains.
In December it placed a train order worth £500mn to support the growth of its new services, as it completed a deal to add another two routes by buying independent open access operator Grand Union. It also has applications with the rail regulator to open three further services.
Sutherland is now looking for more routes to scale this business further, with the intention of turning Lumo into a national brand.
“We have a lot of capacity in rail and did not want to lose it through nationalisation, but put it to good use . . . we are currently working on a number of new potential opportunities,” he said.
FirstGroup is also looking for more deals to expand its bus business, Sutherland said.
“I still think there are more M&A opportunities . . . we have a number of things in our pipeline we are still looking at,” he said.
FirstGroup this month announced a £90mn deal to enter the London bus market by buying French public transport operator RATP’s London business, acquiring contracts to run 90 routes — about 12 per cent of the capital’s bus network.
“We see the RATP London acquisition as the latest in a series of strategic moves by FirstGroup to build a more balanced and diverse portfolio, and ultimately a business with higher overall earnings quality,” Gerald Khoo, an analyst at Panmure Liberum, wrote in a recent note.
The company has also put together a series of smaller deals to build its division running privately contracted bus services, from “park and rides” to transporting workers into the Hinkley Point nuclear power station in Somerset.
In all, Sutherland is aiming to double FirstGroup’s revenues through the changes, by trebling the open access business and doubling bus revenues.
“We think that would help completely reshape FirstGroup . . . we have worked hard to reduce our dependence on public policy,” he said.
