Investors bet on UK transport firms with flurry of M&A activity

Following a recent wave of takeover offers for UK transport operators, inspiratia examines the factors driving investors to the sector and suggests how the trend may play out over coming months and years

Since the start of 2022 there has been a notable uptick in M&A activity in the UK's transport operator sector, with several successful and unsuccessful takeover and merger bids having been made in recent months. This spike in interest in British transport firms is being driven by a range of factors which together make the sector an attractive and safe bet for investors.

While UK transport assets have long been the subject of interest from international investors, the trend has been accelerated by the unique circumstances of the market in 2022, and could lead to further takeover bids and deals in the months ahead.

Transport operators proving attractive assets

The UK's public transport model allows private operators to secure contracts for bus and rail franchises across the country, with the potential to generate lucrative, stable and long-term returns. Following a period of consolidation in the 1990s after the privatisation of bus and rail operations, UK transport operators have formed into several groups with responsibility for multiple concessions. These companies now offer a well-established, highly experienced, and attractive investment opportunity for fund managers seeking to diversify away from core infrastructure assets.

This appeal has been reflected in the recent surge in M&A activity in the UK transport sector. Among the major deals or proposals that have been announced in recent months are the following:

• December 2021 - Proposed merger announced between National Express and Stagecoach, two of the UK's largest transit companies listed on the London Stock Exchange (LSE).
• March 2022 – Stagecoach rejects the proposed merger and announces it has accepted an alternative takeover offer from German asset manager DWS Group.
• April 2022 – Canadian investment firm Northleaf Capital takes a majority stake in Uber Boat, a passenger ferry service provider on the River Thames in London.
• May 2022 – Scotland-based transit company FirstGroup rejects the latest of several unsolicited takeover offers from global private equity firm I Squared Capital.
• May 2022 – Merger between London-based Eurostar and Brussels-based Thalys completed, with a majority stake in the international rail operators taken by French state-owned rail company SNCF.
• June 2022 – UK transport operator Go Ahead Group announced that it has accepted a takeover offer by Australian bus company Kinetic and Spanish transport infrastructure management firm Globalvia Inversiones, selecting the consortium over a rival bid by Australian transport operator Kelsian.

Several factors converging to entice investors

There are several factors driving this renewed investor interest in British transport operators. Investors are seeking guaranteed revenue streams from cheaper non-core assets, as the valuation of traditional infrastructure investments such as toll roads has risen amid tougher competition. Transit operators prove attractive in this regard, as many have seen their share prices tumble in the aftermath of the pandemic. With travel restrictions now largely lifted, investors are betting that the worst of the pandemic is behind us, making this a good time to snap up transit operators whose share prices have yet to recover to pre-pandemic levels.

On top of this, investors see long-term transport trends shifting towards public transit in the context of climate change and emissions reductions targets. The UK government is fully committed to its obligations under the Paris Agreement, and consequently investors expect sustained support for public transport operators. In April 2022, the government announced a £7 billion (US$8.6bn €8.15bn) package of investment in bus services for areas outside of London, illustrating the level of support available to the sector. This will also help to ensure continued demand for transit services in the coming years, offering encouragement that revenue streams will remain strong.

Interest in transport operators also coincides with another prevailing trend for asset managers, namely investing in alignment with environment, sustainability and governance (ESG) principles. Growing numbers of investment houses are signing up to ESG commitments not just for their own businesses but also in those that they invest in. Given the key role of public transport in the decarbonisation process, investment in this sector fits well with ESG strategies, adding another element of appeal for private investors.

Additional takeover targets suggest more activity to come

There are no signs that this trend is slowing down yet, with several UK transport operators still offering attractive potential for investors. Notably, FirstGroup remains an appealing option following the rejection of the takeover bid from I Squared Capital. The fund manager's latest offer valued FirstGroup at £1.2 billion (US$1.5bn €1.4bn), but was partly contingent on the sale of the group's US business and was consequently regarded by the board as undervaluing the company. While FirstGroup's stock price has now risen above £1.30 (US$1.60 €1.51) per share, recovering to its pre-pandemic high, we expect to see further offers for the company from I Squared Capital or other major global asset managers in the months ahead.

Following the breakdown of the proposed merger with Stagecoach, National Express also offers an attractive proposition to investors. The company has a geographically diverse presence across Europe, North America and the Middle East as well as the UK, and operations across transport modes including buses, express coaches, trains and trams. With shares currently trading at just over £2.00 (US$2.45 €2.33) each, the company is valued at less than half it's pre-pandemic level, making it a potentially highly lucrative acquisition target.

Aside from these well-known plays, the UK boasts several other transport operations firms with significant revenue-generating potential. Among these are Govia, the UK's largest rail franchise operator, which currently runs London Thameslink, Southern and Great Northern rail services. Govia is owned by a consortium consisting of Go Ahead Group and Keolis, the former the subject of a recent takeover offer mentioned above, and the latter majority owned by SNCF. Amidst the current shake-up of the sector, there may be an opportunity to acquire a stake in this major franchise.

There are several other public transit companies operating across the UK, some publicly traded and others not, which could prove attractive targets for acquisition. These include large bus service providers such as LSE-listed Rotala, currently trading around 45% lower than its pre-pandemic value, and Midlands-based private firms Centrebus and Wellglade Group. There could also be opportunities to snap up stakes in rail concessions from firms such as government services contractor Serco and Dutch rail operator Abellio, which have interests in multiple rail franchises.