FirstGroup’s New Chairman Pins Dividend Woes on Poor Management

May 21, 2014 6:30 am ET

May 21 (Bloomberg) -- FirstGroup Plc Chairman John McFarlane said the company has mismanaged bus businesses in the U.K. and U.S., leading to a level of under-performance that will prevent it from paying a dividend for the foreseeable future.

First Student, a provider of yellow school buses in North America, together with the main British bus operation, “are well short of their potential and delivering lower margins than their competitors,” McFarlane said in an earnings statement. “We cannot escape that we should have managed them better.”

Chief Executive Officer Tim O’Toole said today he accepts the views expressed by McFarlane, who became chairman on Jan. 1 as Aberdeen, Scotland-based FirstGroup sought to fend off U.S. investor Sandell Asset Management’s calls for a breakup. The company won’t resume dividend payments even after meeting profit goals it had said would trigger rewards for shareholders.

“I’m working very well with John,” O’Toole said on a conference call. “I think he recognizes that over the last few years we have had to come to grips with very difficult situations. I accept his candor and think it’s very helpful and that it improves the dialog with the City.”

Shares of FirstGroup, which runs U.K. rail franchises including the Great Western route and also owns Greyhound inter- city buses, fell as much as 3.6 percent before trading little changed at 132.50 pence as of 10:05 a.m. in London.

Leverage Concern

FirstGroup had said Nov. 6 in its half-yearly report that it anticipated paying a dividend of 50 million pounds ($85 million) for the year to March 31, provided earnings met goals.

While adjusted full-year operating profit that rose 5.5 percent to 268 million pounds was in line after a 14 million pound hit from the harsh U.S. winter, the gain masked a slow turnaround at First Student, with the group figure rescued only by the over-performance of other units, O’Toole said today.

McFarlane said in the statement that there “remains much to do still” at the bus businesses and that the company’s high leverage even after a rights issue last year means it will take “years’ to pare the interest burden, especially with capital requirements high following previous under-spending.

‘‘Taking together the current stage of the First Student and U.K. Bus recovery programs and our commitment to the capital investment program, it will take some time before the group is able to deliver a profile of consistent surplus cash that can be distributed to shareholders,’’ he said.

Sandell Campaign

O’Toole said he has been encouraged by the way prices at First Student ‘‘have been sticking’’ in the early part of the U.S. contract bidding season, though the company has had to raise an annual savings goal for the unit by 50 percent to $150 million to allow for costs from clauses in existing accords.

FirstGroup’s owners were briefed on the dividend decision by its investor relations department, though the CEO said he has had no personal communication with New York-based Sandell, which held a stake of about 3.1 percent as of Jan. 1.

Tom Sandell, who runs the U.S. firm, said last week that his plans were the ‘‘best idea’’ for FirstGroup, having renewed calls for a revamp on Jan. 15. The investor sought the disposal of Greyhound and a spin off of stock in the remaining U.S. business to investors, with proceeds used to repay debt and expand in U.K. rail and bus. Those actions could come in parallel to O’Toole’s turnaround program, according to Sandell.

FirstGroup shares have advanced 14 percent since Sandell put forward an initial plan on Dec. 11 and are up 7.2 percent this year, giving a market value of 1.6 billion pounds.

O’Toole said today that FirstGroup is putting together a ‘‘compelling” bid to run the London-Scotland East Coast route and compete with proposals from a venture of Stagecoach Group Plc and Virgin Trains and another comprising the Keolis unit of French state railway SNCF and Eurostar Group Ltd.

The CEO said the First Great Western rail brand is working to win back customers who deserted to other modes of transport after the collapse of the Dawlish seawall severed the main line to the counties of Devon and Cornwall for two months.