Yahoo Finance FirstGroup activist Coast pulled back after signalling support for US deal
The US hedge fund leading the fight against FirstGroup's £3.3bn sale of its American divisions was initially willing to back the terms of the deal it now bitterly opposes, leaked documents show.
Coast Capital Management, FirstGroup's largest shareholder, said it would support the sale of First Student and First Transit if four conditions were met in a letter on Apr 21, The Telegraph can reveal.
A prospective sale would need to raise at least $4.7bn (£3.3bn), be fully financed by the acquirer, include a break fee of at least £10m and be subject to a shareholder vote, the letter shows.
It was sent 48 hours before FirstGroup announced that it had struck a deal with EQT Infrastructure to sell the two businesses, in an agreement that satisfied these conditions.
Coast justified its apparent change of heart by disputing the £3.3bn headline price.
The sale of First Student, America’s largest operator of school buses, and First Transit, followed a campaign led by Coast to offload the FTSE 250 company’s most lucrative assets.
Shareholders are understood to be disappointed that little more than a tenth of the proceeds will be shared with them, with the company opting to allocate the lion's share to plugging its pension deficit and other debts.
Coast and Schroders, FirstGroup’s second-largest shareholder, are opposing the sale because they believe that the headline price is not high enough.
Coast said last week: “The proposed transaction is the result of a sub-optimal and incomplete process at an inopportune time.”
Schroders added: “After careful consideration of the merits of the proposed sale of First Student and First Transit, we have the intention of voting against the deal as it stands, as we believe it undervalues these businesses.”
Columbia Threadneedle, which owns around 10pc of FirstGroup, is supporting the sale.
Proxy advisers are split, with ISS and PIRC supportive of management and Glass Lewis opposing.
Shareholders are due to vote on the deal on Thursday. It is understood that FirstGroup executives were mulling the results of early proxy voting on Monday afternoon. They may cancel the ballot if a loss looks likely.
The April 21 letter also reveals that Coast was lobbying FirstGroup chairman David Martin to consider spinning First Student and First Transit off into a special-purpose acquisition company (Spac).
Spacs are shell companies that raise money through an initial public offering for the purpose of acquiring existing companies.
Splitting the businesses off and floating them in the US would attract a valuation of $4.7bn, investment bankers from UBS concluded, according to Coast.
Coast threatened over the weekend to take legal action against FirstGroup unless it did not delay or call off the sale of the two divisions.
James Rasteh, chief investment officer at Coast, said: “The company’s £3.3bn headline number is misleading – the actual proceeds are £2.8bn, for a business that generates over £450m in Ebitda [earnings].
“If EQT were confident of the pay-out within three years, they would present it to investors now, especially as interest rates are near or below zero.
“Coast has evidence that the board has ignored many suitable buyers, who are energised by the dramatic improvement in the company’s prospects and have approached Coast.”
FirstGroup declined to comment.
