ComfortDelGro Corporation Limited - Why did it buy only part of FirstGroup's bus business in London?

24/4/2013 – Brokers have reacted positively to ComfortDelGro's announcement it is buying part of FirstGroup's London bus business for GBP57.5 mln or S$109 mln.

This business will comprise a fleet of 494 buses operated from five depots, with about 1,700 employees.

The business has an annual turnover of about GBP111 mln or S$211 mln, with an EBITDA margin of close to 10%.

ComfortDelGro’s market share of UK bus travel would increase by 7%-points to 19%, sharing a joint second position with Arriva.

Go-Ahead currently leads the UK bus market with 24% market share.

UOB KayHian continues to like ComfortDelGro for its consistent ability to balance the challenging domestic public transport segment with contributions from overseas operations.

Hence, it maintained a HOLD rating with a target price of S$1.92.

OCBC Research also maintained its HOLD rating with a target price of S$1.95.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why did it buy only part of FirstGroups’ bus business in London?

ComfortDelGro acquired bus depots at Alperton, Greenford, Hayes, Uxbridge and Willesden Junction, along with 494 vehicles and about 1,700 employees.

However, the bus depots at Atlas Road, Lea Interchange and Westbourne Park, along with 400 vehicles and 1,500 employees, were transferred to Transit Systems Group, an Australian transport operator, on completion of the sale for GBP21.3 mln.

What was wrong with these operations?

Why did ComfortDelGro not keep them?

Question

2. How does ComfortDelGro benefit from the acquired business when FirstGroup did not see any potential?

Commenting on the sale, Giles Fearnley, First’s Managing Director UK Bus, said in a press release:

"The sale of these operations marks further progress in our programme to reposition our UK Bus portfolio, recover performance and equip the business to achieve sustainable revenue and patronage growth. Our strategy is to focus on those areas of the country which offer the greatest potential and while we have been a key operator in London for many years, our focus going forward is on the deregulated market outside of the capital."

If FirstGroup doesn’t think there’s potential in the London business, what opportunity does ComfortDelGro see here?

This leads to our next question.

Question

3. Is regulation a problem for ComfortDelGro?

It operates in a regulated market in Singapore, where the Public Transport Council sets fares.

How would this background give ComfortDelGro the ability to thrive where FirstGroup couldn’t?

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).


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