Mobico’s school bus sale fails to solve debt conundrum7 May 2025 11:33
Article from Investors Chronicle
The deal will not dent the company’s debt burden, and options to repair its strained balance sheet are narrowing
The ‘art of the deal’ is a phrase many will have heard since Trump’s ‘liberation day’ tariffs – and the climbdown that followed. But Mobico (MCG) shareholders and analysts would argue there was hardly any art in the National Express owner’s long-awaited sale of its North American yellow school bus arm to private equity group I Squared Capital.
In a move floated in October 2023 as a way to chip away at its debt pile, the public transport operator agreed to sell the division for an enterprise value of up to $608mn (£453mn) last month, a deal Peel Hunt analyst Alexander Paterson termed “shockingly bad”. This appears to resonate with investors – the share price has halved since the announcement.
Jefferies had estimated that the division could be worth between $650mn and $1.6bn, but the final price tag isn’t even the biggest worry. Once lease repayments, deferred capital expenditure and transaction fees are taken into account, the group will only pocket about $365mn-$385mn in upfront cash, with another $70mn in potential earn-out payments contingent on performance.
Roughly $75mn of the upfront proceeds go towards legacy lease liabilities tied to the business, with the rest initially held as cash. The group is also retaining exposure to £65mn of historic claim liabilities. On top of that, it will incur (unquantified) separation costs and there’s been no mention of hedging of the proceeds against US dollar.
Mobico said the sale is expected to have a “neutral” impact on covenant net debt, a metric that excludes its £500mn hybrid perpetual bond and debt-like items such as fleet and property leases. However, Paterson argued that “true” or effective net debt, which accounts for both the hybrid bond and lease obligations, would actually increase.
“The £500mn hybrid is clearly a debt instrument, paying a coupon which steps up if it is not redeemed at the earliest point [at the] end of 2025,” he told Investors’ Chronicle. If the group doesn’t redeem the bond by the February 2026 reset date, he estimates the coupon payment could double to £41mn. Mobico spent nearly £90mn in interest charges last year.
As losses have piled up due to a painfully slow pandemic recovery, adjusted net debt has ballooned to more than £1.2bn, with a leverage ratio of 2.8 times Ebitda at the end of 2024, compared with a covenant test limit of 3.5 times. The group had previously targeted a reduction of this ratio to 1.5-2 times by 2027, but has now softened that to “over time”.
Analysts say effective leverage is a more accurate measure of the true financial risk faced by Mobico’s equity shareholders. On this measure, Panmure Liberum analyst Gerald Khoo said net debt to Ebitda is set to remain above four times. “We consider this to be unacceptably high,” he said.
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