SAN FRANCISCO, CALIFORNIA – SEPTEMBER 13, 2018: A first student school bus picks up students in San Francisco, California. First Student Inc. is North America’s premier school bus transportation company.
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LONDON – British multinational transport company First group faces a shareholder rebellion over the sale of its two US bus companies – one of which operates the iconic yellow school buses – to Swedish private equity firm EQT.
The Aberdeen-based company’s two major shareholders, Coast Capital and Schrodersannounced public opposition to the sale of First Student, the largest US school bus operator, for $ 4.6 billion and the outsourcing of public transportation company First Transit to EQT Infrastructure.
Glass Lewis, one of the world’s largest shareholder proxy advisors, will also vote against the deal at FirstGroup’s general meeting on May 27, citing “poor transaction timing and rating”.
James Rasteh, CIO of Coast Capital, told CNBC on Friday that it was “very irresponsible to vote for this transaction,” which is “a clear destruction of its value.”
The two businesses make up a significant majority of FirstGroup’s global sales. However, the company has chosen to focus on UK bus and train operations alongside the sale of the US intercity bus service Greyhound.
Coast Capital has a 14% stake in FirstGroup, while Schroders has a 12% stake according to Refinitiv data. The company’s third largest shareholder, Columbia Threadneedle, partnered with proxy advisory agencies ISS, IVIS and PIRC in the EQT sale.
The backlash is centered on FirstGroup’s rejection of other proposals for the sale of the US operations. According to two high-ranking banks with knowledge of the process, who wanted to remain anonymous due to their professional position, an alternative proposal might have brought shareholders higher returns in the long term than the proposed deal with the Swedish private equity firm EQT.
An email from the sales advisor at the end of April JPMorgan Cazenove FirstGroup executives, including CEO Matthew Gregory, who was spotted by CNBC, received a $ 4.7 billion acquisition proposal for the US company, sources reported by SPAC (Special Purpose Acquisition Company) has been confirmed by UBS.
Sources claim the deal would have allowed the two companies to list as a US company, with current shareholders keeping their stake and maintaining the value created by the sale. The EQT offering is valued at $ 4.5 billion in the email and has a deductible of approximately $ 1.17 billion.
JPMorgan Cazenove, who has advised Sachs on the sale of the EQT infrastructure with Rothschild & Co. and Goldman, said Coast Capital is likely to see the proposal as “probably at least 25% more attractive than EQT’s offer,” though the agent does not do this I am not certifying that it is worth 25% more. The email adds that Coast Capital “wants to feel like we have looked at it openly and have not been too quick to discard.”
In a statement on Friday, FirstGroup Coast accused Coast of relying on “grossly misleading” EBITDA (earnings before interest, taxes, depreciation, and amortization) due to errors in accounting for exchange rates and earnout (future compensation for the sellers of the business based on financial performance or future sale, working capital, and accrued investments. The company also attacked the hedge fund’s book value multiple and peer comparisons.
Coast Capital issued its own lengthy response on those allegations in a statement on Monday alleging multiple inaccuracies in the presentation of the numbers by FirstGroup and the company attempted “to use accounting tactics to hide the obvious shortcomings and exceptionally low valuation of this offering
relies on the most valuable assets of the shareholders. “
“The board also doesn’t seem to understand that these companies will benefit from substantial federal grants and a reopening and recovery of the US economy,” he added.
FirstGroup has reiterated that a “comprehensive and competitive sales process” has been initiated with over 40 bidders and that Coast Capital has carefully considered all proposals over a period of several years.
CINCINNATI – JULY 22: FirstGroup America headquarters photographed from the Carew Tower observatory deck in Cincinnati, Ohio on July 22, 2017.
Raymond Boyd / Getty Images
FirstGroup cited an earnout structure for First Transit in which the company will receive 62.5% of the value of First Transit over $ 380 million, “either on the third anniversary of the sale or earlier if Transit is sold to a third party”.
“When I joined the board of directors in August 2019, I made it clear that my goal was to unlock value within the group,” said David Martin, chairman of FirstGroup, in the statement on Friday.
“After an extensive strategic review, we conducted a comprehensive and well-publicized sales process that achieved full value and allowed the Group to return value to shareholders, address its old challenges and strengthen its position for the future.”
Coast Capital has denied this, claiming that if EQT does not resell the company at a higher value within three years, chaotic arbitration is likely to ensue as the private equity firm and shareholders try to get a fair equity value for the company to achieve.
“We are definitely excited to include the earnout in the multiple if it is prepaid,” said Chad Tappendorf, partner at Coast Capital. “But they don’t, and it is not at all market practice to include something that is not safe in a heading multiplier.”
When management first announced the sale with its display of the value it generated, FirstGroup’s share price rose 17% to an intraday high of 101.30 pence on April 23, 2021. However, Tappendorf found that shareholders reviewed the presentation and began to question the value.The company’s assigned share price fell around 27% to 73.10 pence over the next two weeks.
The two leading banks said that after first starting the pre-Covid-19 process, FirstGroup refused to consider options beyond the EQT deal after it had worked with Swedish private equity firm prior to the announcement. Company concluded a “no-shop clause” had intentions to sell the business.
“The decisions they made 18 months ago were the right decisions, but they didn’t update those decisions for the new world,” a source said.
“It was a fair price to pay for the process they went through, but the process was the wrong process.”
However, in its report on the voting recommendation, the ISS shareholder representative noted that while the no-shop clause prevents the board of directors from “acquiring, soliciting or encouraging” potential bidders to submit a competing bid, it would be permitted to make one “Unsolicited Competing Proposal” to consider as long as it is received before the resolution has been approved by shareholders and constitutes a “superior offer”.
Another source, an independent transatlantic M&A expert with direct knowledge of the sales process who preferred to remain anonymous for commercial reasons, told CNBC that “the lack of fairness opinion suggests that FirstGroup management is in the A rush to complete this transaction, stumbled upon is bad business. “
A fairness opinion is a summary letter prepared by an investment bank or an independent third party that determines whether the terms and finances of a merger or acquisition are fair.
“The lack of a fairness opinion from an independent advisor, as well as the increasing evidence from Coast Capital that more attractive alternatives exist that continue to be ignored, are all evidence that a board is failing to meet its fiduciary responsibility,” Coast added Monday.
Although no fairness opinion was given, FirstGroup was advised by three investment banks as part of the sales process.