The award is a significant fillip to FirstGroup, which also operates the Great Western franchise to Wales and the west of England, Trans Pennine Express and Hull Trains. First will pay premiums with a net present value of £2.6bn over seven years for the right to run the service. The new operator will be obliged to introduce 90 brand-new trains by 2020 on suburban services around south-west London and running to Windsor and Reading. The trains will replace rolling stock dating back to as long ago as the 1980s. FirstGroup said it was in “advanced discussions” with a number of manufacturers about a potential order for the trains. The trains will add to an order of 30 new five-car trains from Germany’s Siemens currently coming into service on the route. Go to Financial Times>>
More details on the financing indicate that this is a leveraged transaction with most of the money coming from investment partner MTR.
The franchise is to benefit from £1·2bn of investment, of which £80m will be directly funded by the operator. The extra capacity this will create is expected to help increase passenger revenues, which were £991m in 2015-16. The new operator will make premium payments over the core period with a real net present value of £2·6bn in 2017-18 prices and discounted using the DfT's 'real' rate of 3·5%.
The joint venture shareholders will provide a loan of up to £30m, and £88m (of which 50% is bonded) in subordinated contingent loan facilities to the operator, as well as a £15m performance bond and a season ticket bond of up to £80m. The franchise terms include GDP and Central London Employment revenue protection mechanisms to mitigate the impact of exogenous economic factors outside the control of the operator, and a profit sharing arrangement whereby a proportion of profit in excess of pre-specified thresholds will be payable to DfT.
FirstGroup said it expects to achieve 'margins comparable with the recent overall industry average and to earn an appropriate return over the life of the contract, reflecting the franchise risk profile.' It expects a working capital inflow of approximately £100m principally relating to season ticket monies, to be treated as restricted cash. Go to RailwayGazette>>
The Union representing rail workers in the UK is not thrilled with the partnership with MTR which operates the Hong Kong subway.
RMT union general secretary Mick Cash warned that the Chinese state was "set to make a killing at the British taxpayers' expense". "The nonsense is that with the government triggering Article 50 this week they would be free to ignore EU rail directives that slam a block on public ownership," he said.
"It is frankly ludicrous that the Tories are continuing with the 'any state but the British state' policy which has plundered our railways for over two decades. "RMT is deeply concerned at exactly what this announcement will mean for our members, these crucial rail services and the safety of the travelling public. "We will be seeking an early meeting with the new owners to secure cast iron guarantees on the jobs and role of the guards, the future of the wider workforce and the safety and quality of passenger services." Go to Int. Business Times>>
According to Cash the deal would mean about 75% of UK rail routes would soon be operated by state-owned foreign companies, after an Italian state firm took over C2C. “Once again the government has refused to consider the public sector option for a major rail franchise and instead it’s a foreign state operator, in this case the Chinese state, which is set to make a killing at the British taxpayers’ expense,” he said. “That is nothing short of a scandal and reinforces the demand for nationalization of our rail assets for the benefit of the British passenger and taxpayer. The nonsense is that, with the government triggering article 50 this week, they would be free to ignore EU rail directives that slam a block on public ownership." Go to The Guardian>>
As a result of this news FirstGroup share prices have demonstrated an upward trend over the last few days.
Shares in FirstGroup also surged as much as 12.6pc to 116.1p after the business pleased investors by saying it expects “significantly increased cash generation” in the current financial year, spurring speculation a resumption of the dividend is on the horizon. “People can finally see this is the pay-off year,” Mr O’Toole said. “We think the generation of cash is sufficient to bring down our leverage and ultimately restore a dividend.” Go to the Telegraph>>
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