(Alliance News) - Analysts at Berenberg on Friday said FirstGroup PLC may receive a higher takeover offer with the company offering a "compelling" outlook, as the UK transport sector comes into M&A play.
Broker Liberum, meanwhile, said the bid by I Squared Capital Advisors offers only a "minimal premium".
Under the terms of the deal, FirstGroup is valued at roughly GBP885 million, with potentially an extra GBP342 million on top of that based on First Transit and Greyhound disposal returns.
I Squared has offered 118 pence per share in cash, plus 45.6p more contingent on the proceeds of FirstGroup's recent disposals of First Transit and Greyhound. That makes 163.6p in total.
The offer followed a series of other proposals from I Squared.
FirstGroup shares were 5.5% higher at 136.88p each in London on Friday morning.
In April 2021, FirstGroup agreed to sell its First Student and First Transit businesses in the US to EQT Infrastructure, part of Swedish private equity firm EQT AB, for USD3.12 billion.
In October of that year, it agreed the sale of Greyhound Lines in the US for USD172 million, completing its strategy to focus on its UK public transport businesses.
On the bid by I Squared, Berenberg expects FirstGroup to "take into account feedback from shareholders".
The German bank explained: "We believe that some of the large shareholders will think that the offer undervalues FirstGroup. We also suspect that shareholders may not be blown away by an offer for which most of the upside looks like it will be deferred for up to two years (albeit we appreciate the shares have already moved above the 118p non-contingent element of the offer)."
Berenberg said there could be potential for a higher offer, particularly due to the UK transport sector being subject to M&A action recently.
Last week, Pan-European Infrastructure III SCSp, an infrastructure fund managed by DWS Infrastructure, declared its acquisition of Stagecoach Group PLC unconditional. Stagecoach had backed out of an all-share merger with National Express Group PLC.
Transport sector valuations were hit by Covid-19. Despite the M&A interest, FirstGroup shares are just up 4.5% from levels seen before Covid-19-induced sell-offs in 2020. Stagecoach is down roughly 25%, while National Express is down around 35%.
Aside from sector-wide M&A interest, FirstGroup itself has a "compelling" future, Berenberg said, boosting the case for a stronger takeover offer.
"[In particular] the scale of cash returns it could provide to equity holders in the years ahead. We think the shares remain cheap – deal or no deal – and reiterate our 'buy' rating."
Berenberg has a 150p price target for the stock.
Liberum also believes a stronger bid could be incoming. The broker does not think the initial tilt is high enough.
"We see a minimal premium being offered for the business, while the contingent value rights do not reflect the full potential of FirstGroup's incremental sources of value and leave shareholders exposed to ongoing downside risk," Liberum explained.
"The maximum consideration of 163.6p is 21% above our 135p [sum of the parts]-based target price. However, our valuation includes conservative assumptions on the Transit and Greyhound sources of incremental value."
Liberum's SOTP estimate assumes a 30p contribution from Transit and Greyhound proceeds, compared to 42p if Transit earnouts were to be achieved.
The SOTP figure does not include any value based on a potential return of pension escrow cash, worth up to 16p per share.
"Consequently, the 45.6p contingent value right appears to us to represent a discount to the best case scenario value for the incremental sources of value," Liberum added.
"Taking our SOTP valuation and removing our assumed values for the Transit earnout and Greyhound realisation gives a core trading valuation of 105p per share. Again, while the potential upfront 118p per share consideration is a premium, we consider our valuation to have conservative assumptions."
Liberum rates FirstGroup at 'buy' with a 135p price target.
By Eric Cunha; ericcunha@alliancenews.com
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