Stagecoach in pounds 475m rail takeover

A handful of rail executives were turned into multi-millionaires yesterday as Stagecoach, the aggressive bus and rail group, unveiled a pounds 475m takeover of the rolling stock leasing company Porterbrook.

But the deal provoked immediate criticism and a full-scale regulatory investigation was launched. If the deal is allowed through it would fundamentally change the structure of the privatised railway industry Porterbrook was bought off the Government in january by a management-led buyout for pounds 527m. The effective price paid yesterday by Stagecoach, including debt is pounds 825m.

The 20 per cent stake held by the managment of Porterbrook, led by managing director Sandy Anderson, is worth pounds 92.5m on the basis of the Stagecoach bid. At the time of privatisation just seven months ago it was valued at pounds 15m although the Porterbrook chief and the remaining 49 staff are thought to have paid only a fraction of that amount for their shares.

Stagecoach, which already owns the South West Trains franchise and is bidding for the 12 remaining passenger franchises being auctioned off immediately offered undertakings to safeguard competition in a bid to prevent the deal being referred to the Monopolies and Mergers Commission.

It also said it would be placing an order for pounds 90m for new rolling stock for South West Trains. Previously, the company had said that no new trains were needed for the seven year term of the franchise which started last February.

The carefully constructed edifice of rail privatisation developed over the past three years by the Government has been put in jeopardy by the proposed deal. Labour's new shadow transport secretary, Andrew Smith, immediately raised questions about the merger. He said: "It is a matter of concern that Stagecoach is now in a position from which it might be able to inhibit competitors. Any potential bidders for the remaining franchises will need to look carefully at the implications of this deal where rail companies will be forced to lease rolling stock from their competitors."

The move by Stagecoach towards vertical integration poses a series of questions for the rail regulator, John Swift, and the Office of Fair Trading to consider. Mr Swift issued a 22 paragraph consultation paper on the proposed deal, giving respondents three weeks to send in their views. He has asked, in particular, for views on the effect of the merger on investment in new rolling stock and on competition in the market for rolling stock and in the provision of passenger services. He will report to the Office of Fair Trading which, in turn, will advise the DTI. Mr Swift's position is complicated by the limits of his power. While conntracts between Railtrack and the train operating companies, the rolling stock companies such as Porterbrook are exempt from his scrutiny.

The ramifications for the rail industry are very uncertain and are worrying many of the private companies which have entered the market since privatisation began in earnest a year ago. The inter-relationship between the different players in the rail industry are already complex and if one company is vertically integrated, others fear it will be in a position to outbid rivals in the franchising process.

Aware of these fears, Stagecoach's statement yesterday said that the terms offered by Porterbrook to any train operating company "will not unfairly discriminate" compared with companies controled by Stagecoach.

However, such promises met with derision among some of the other players in the rail industry. One senior source said: "If anyone thinks that Porterbrook will be offering the same deal to other bidders for train companies as they will to Stagecoach, they are living in cloud-cuckoo land. There isn't the faintest chance of that happening. This is a red-tooth-and-claw environment."

While Stagecoach won the first franchise, South West Trains, it has been in the bidding for all eight so far allocated and has promised to bid for all the remainder of the 25.

Comment, page 19

The consolidation of the bus industry into three large groupings continued yesterday with the acquisition of North East Bus by the Cowie Group. The three groups - Cowie, Stagecoach and FirstBus - now have a 55 per cent share of the UK bus market.

Cowie, the car sales, bus and finance group, based in Sunderland, paid pounds 24.5m to National Express group for the bus company. North East Bus has annual sales of almost pounds 29m and runs services in County Durham and Teesside in North-east England, where Cowie already owns Northumbria Buses and Yorkshire Bus. North East Bus made a profit of pounds 3m last year and owns 422 buses and has nearly 1,200 employees.