The departing chairman of FirstGroup tells Nathalie Thomas about losing the West Coast deal and how he set the transport giant back on the right track.
Asking shareholders to put up £615m in cash is hardly the most discreet way to end a 27-year association with a company. But that is what Martin Gilbert, the chairman of debt-laden bus and rail company, FirstGroup, had to deal with last week.
Gilbert, who is also the chief executive of Aberdeen Asset Management, will step down from the firm he joined back when it was a mere minnow called Grampian Regional Transport after it has completed a £615m rights issue this summer.
FirstGroup’s shares have tumbled 43pc since Monday, when the cash call was announced to avoid a downgrade in its credit rating to junk status – an outcome that would have led to problems when bidding for major government contracts such as rail franchises.
Shareholder groups such as Pirc had previously raised concerns about Gilbert’s ability to devote enough time to FirstGroup, giving rise to suggestions that investors had demanded his resignation as a condition of supporting the fundraising.
But Gilbert, who is also on the board of BSkyB, is philosophical about the whole affair. Sitting in a meeting room at Aberdeen Asset Management, he is relaxed as he discusses the land he recently acquired in his home country of Scotland.
He has weathered worse storms
The 57-year-old has weathered worse storms during his career – even he admits he was lucky to hold on to his job at Aberdeen Asset Management during the split-capital investment trust debacle, which cost the company close to £200m in voluntary repayments and saw its share price crash as low as 18p. It is now at 479.1p.
Gilbert makes it clear that he is prepared to take “full responsibility” for FirstGroup’s rights issue but stresses that he in fact wanted to resign as chairman last year and told investors as much. He was persuaded to stay on an extra 12 months to help sort out the company’s balance sheet and set the transport giant, which has operations on both sides of the Atlantic, back on an even keel.
“As Aberdeen got bigger and entered the FTSE 100 and FirstGroup was such a vast company, I decided a year ago that I should resign – about this time last year – and I spoke to a number of institutions then,” he said.
“Then of course what happened, inevitably, was we decided that we really needed to address the balance sheet issue. The board asked me to stay on and help get the balance sheet sorted out over the last year. There was no shareholder pressure and the board didn’t want me to go. It was my decision – solely – to go, basically.”
Tim O’Toole, FirstGroup’s chief executive, faced questions last week over why the chairman is heading for the exit and not the man in the driving seat. It is understood from sources close to the company that O’Toole did talk about quitting. He admitted on Monday that his two-and-a-half years at the helm had been a “hard slog”.
But Gilbert won’t hear a bad word about the American, who was previously managing director of London Underground and first joined FirstGroup as a non-executive director in May 2009.
“Tim is a very decent guy,” says Gilbert. “I think he is the right person to lead FirstGroup going forward from here. With the weakness in the balance sheet fully repaired, it’ll give him an opportunity to run the business correctly.”
FirstGroup has been labouring under nearly £2bn of debt, a burden it took on in 2007 when it staged a $3.5bn (£2.3bn) takeover of Laidlaw in the US, the operator of Greyhound long-distance coaches and yellow school buses.
The deal was masterminded by Sir Moir Lockhead, FirstGroup’s former chief executive and its previous finance director, Dean Finch, now head of rival National Express. Gilbert is one of the few remaining members of the old guard who gave the deal a green light.
Given that the US bus business is now in turnaround mode, it would be easy to assume FirstGroup’s management at the time was drunk on the same kind of liquor that fuelled a slew of highly-leveraged deals pre-the financial crisis.
Staunch defence of US bus takeover
Gilbert admits not everything went to plan with the funding of the deal but he vigorously defends the rationale for the takeover, which turned the former minnow into the biggest fish in the US school bus market.
“No, no the Laidlaw deal was fine,” he says. “The price was fine. The plan was to either sell one of the subsidiaries and when we didn’t sell it, we should have had a rights issue. It was funded wrongly rather than a bad deal.”
The subsidiary FirstGroup had planned to sell was Greyhound. That option was re-explored again recently when the company’s advisors carried out an exhaustive review of alternative options – to avoid having to go to shareholders.
However, disposing of a much-loved brand and highly cash-generative business such as Greyhound wouldn’t have solved the problem, which Gilbert insists wasn’t a question of liquidity but credit rating.
“There was no problem with the level of debt or the servicing of debt because debt is so cheap,” he says. “It’s purely a rating agency issue and if you have got a rating agency issue, it’s going to damage the business going forward in the future of rail franchise bids.”
Gilbert says the company, which last week also scrapped its dividend, knew this time last year that it would have to axe its final payout to shareholders, although it kept the interim payment in place. Until the autumn, the rail and bus group had been hoping to find an “operational solution” to its woes. And in August everything was looking good, when it was named the preferred bidder for the West Coast Main Line rail franchise – a 13-year contract with the possibility of an extension to 15 years.
Then Sir Richard Branson, whose Virgin Rail Group lost out on the contract, went to war, calling FirstGroup’s bid “insane” and declaring that it would have risked “almost certain bankruptcy”.
Last October, the Department for Transport performed an extraordinary about turn in the face of a legal challenge by Virgin, scrapping not only the West Coast contract but consigning the entire re-franchising programme to the scrapheap .
Since last week’s rights issue announcement, FirstGroup’s critics have felt vindicated, claiming the cash call justifies suspicions that the company had gone out last year to win the West Coast deal at all costs. Gilbert still insists FirstGroup had a “very good bid”, which he says, “wasn’t that far apart” from the offer tabled by Virgin. Sir Richard, he says, “played a blinder” with an aggressive PR campaign. As a result of the debacle, Virgin will continue to run the West Coast line until April 2017.
West Coast debacle did a ‘huge amount of damage’
Gilbert says he is “not convinced” FirstGroup wouldn’t have had to resort to a rights issue even if the West Coast franchise competition hadn’t deteriorated into chaos – it would simply have been a much smaller cash call.
But he says the affair, and in particular the Government’s decision to slam the brakes on other franchise competitions, did a “huge amount of damage”.
“Not so much losing the West Coast Main Line but the whole halting of the franchising for two years really knocked a hole in our projected earnings going forward,” Gilbert says.
FirstGroup, which runs five major rail lines in Britain, claims most of its major shareholders turned supportive of its £615m rights issue once the rationale was explained to them. It will allow the company to invest £1.6bn over the next four years to stimulate growth.
Supporters of Gilbert suggest he has unfairly taken the rap in public for the problems. It is understood he suggested launching a rights issue two years ago, not long after O’Toole came into the job, but it was blocked by other board members.
“I’m just pleased to be leaving it in good health with what I think is a good management team now, Gilbert says. “If it gets its balance sheet sorted out and has a bit of luck in the franchising, this company will go from strength to strength. With the benefit of hindsight maybe I should have gone two years ago rather than wanting to go a year ago, but that’s life. You never get your timing right.”
Martin Gilbert CV
Job Chief executive of Aberdeen Asset Management and chairman of FirstGroup
Family Married with three children
Home Aberdeen and London
First job Tobacco picker in Canada
Not a lot of people know that He has sailed across the Atlantic