Nomura's Angel looks for train merger

Angel Train Contracts, the rolling stock leasing company sold last year for pounds 700m to a consortium led by the Japanese bank Nomura, is considering a merger with a privatised train operator to create another giant vertically integrated rail group.

The company, one of three train leasing businesses privatised by the Government last November, has received approaches from about half-a- dozen transport groups, including a number of companies that have succeeded in taking over British Rail passenger franchises.

Nomura, which in effect controls 85 per cent of Angel, has examined selling the business altogether. But the preferred option is a joint venture with a rail operator. Among the groups that have emerged as big train operators are the coach company National Express and the French group Generale des Eaux, both of which have captured two passenger franchises.

Nomura's move has been prompted by the pounds 825m bid by Stagecoach for another of the leasing companies, Porterbrook. The takeover caused an outcry after it emerged that three directors of Porterbrook who took part in the original buyout of the company stand to make a pounds 65m profit.

But the deal has also caused consternation among competition authorities because of the vertical integration it would produce. Stagecoach already operates the South West Trains franchise, the biggest commuter railway in Europe, and has served notice that it intends bidding for all 12 remaining franchises being sold off by the Government.

Speculation is rife that the third leasing company, Eversholt, will go the same way as Porterbrook. Eversholt was bought for pounds 580m by a management team backed by six venture capital funds led by Candover Partners.

The rail regulator, John Swift, the Office of Passenger Rail Franchising and the Office of Fair Trading are all investigating the Stagecoach-Porterbrook takeover. The deal may be referred to the Monopolies and Mergers Commission.

Angel was bought by GRS Holding Company, a consortium led by Nomura International, the British subsidiary of Nomura Securities, the Japanese investment bank. The other members of the consortium are Prideaux and Associates, a railway consultancy chaired by Dr John Prideaux, a former managing director of InterCity, and Babcock & Brown, a specialist leasing and finance company.

Nomura raised pounds 550m of triple-A-rated debt and a further pounds 150m of subordinated debt with warrants attached to fund the acquisition. The warrant-backed debt is in effect the equity. Nomura holds 85 per cent of the warrants, with the remainder split between the two other partners.

Angel has contracts with 19 of the 25 train operating companies and owns 3,755 vehicles, a third of which are less than eight years old. Nomura has put a pounds 400m line of credit in place to enable Angel to buy new rolling stock. The company is chaired by Dr Prideaux and employs about 50 people in offices next to King's Cross station in London.

The consortium comfortably outbid a rival management buyout team, backed ironically by Stagecoach because of the way it was financially engineered by Nomura. The Japanese bank securitised the debt used to buy the business against its guaranteed future revenue streams, enabling it to cut the cost of funds.

Angel had been planning to find franchise operators to put up equity to help fund new rolling stock.

But the Stagecoach-Porterbrook deal has forced it to rethink strategy.

Stagecoach has pledged that if the Porterbrook deal goes through, it will not do sweetheart deals between its train leasing and operating companies.

But one industry observer said: "If you have 3,000 trains on the market and a large chunk of them were coming to the end of their lease period, what would you do?"