National Express to fight being railroaded

For a man whose company is in a fight for its life, John Devaney, National Express chairman, is unusually relaxed. Glancing through the FT’s windows at the swirling river below, he says: “I like watching the boats go by.”

In his first interview since taking the job three months ago, Mr Devaney blames the Department for Transport for National Express’s woes and insists the heavily indebted bus and rail operator can survive without a takeover. “We don’t need to do a deal; our focus isn’t to do a deal,” he says.

His comments may surprise investors and analysts. “I just can’t see National Express having an independent future,” says a source close to the company.

The predators are circling and whereas many companies can deal with their problems more quietly, the moves of a public transport operator make for front page news.

Even before the negative publicity sparked by the fall-out from its decision to renege on a contract to run the East Coast railway line between London and Edinburgh, National Express was a household name – the red and blue livery on its coaches a regular feature of motorways as it ferried people between cities for as little as a few pounds.

But if buses remain relatively recession-proof, it was an acquisition spree in this most attractive part of the business that got it into trouble, a fact Mr Devaney is only too ready to admit.

The source of a large part of the company’s £1bn debt problem is a coach group called Alsa, the market leader in Spain, bought from the Cosmen family, now a key shareholder. The business remains vibrant and profitable – one bus station in Madrid sees as many people pass through it as Heathrow every day – but it was also bought with borrowed money.

Mr Devaney believes National Express can whittle away at its debt mountain. There is shareholder support for a rights issue, he says, “but a right-sized one”, and that banks are “supportive”.

The East Coast mainline was a millstone, requiring the company to pay the government a total £1.4bn in tranches to run the line until 2016. As passenger numbers fell and travellers switched to cheaper tickets, the losses – £20m in the first six months of the year – “were just too big for the rest of the group to cope with,” Mr Devaney says.

Without it, he says, the company can focus on reducing costs of its businesses in North America and Spain. It has already shaved £200m from its debt this year and there are further savings to be made. Head office staff can be cut, he says, some fuel deals to be improved, and fewer drivers needed to run its US school buses, already protected from the downturn by government contracts.

The positives are a fledging North African enterprise, not to mention the lucrative remaining rail franchises it hopes to continue to run in the UK.

The question is whether that will be enough.

There is no doubt that National Express has profitable businesses; it is these that are attracting the predators. It earned £28.6m from its Spanish coaches in the first six months of this year and £21.8m from its British buses.

Just this week, however, its East Anglia train service was shut by strike action – a reminder that there is a limit to cost savings that can be made before services start to be affected.

There is also the matter of the debt terms, some of which need to be met by the end of the year and a further tranche that must be renegotiated by September 2010, though Mr Devaney is confident he will be “able to sort it out”.

A gruff Lancastrian and former engineer who is credited with rescuing Marconi, the telecoms equipment maker, from the brink of insolvency, Mr Devaney is an experienced operator who has won the support of the City.

But investors do not like uncertainty. Finding a replacement for Richard Bowker, the former chief executive, could take another six months. A row with the government over whether it can retain its two remaining rail franchises will not even begin to be resolved until November, when National Express will finally hand back the East Coast franchise after burning through the remaining £22m it is contracted to put into the line.

Mr Devaney is keen to point to a strong record in running the two more profitable franchises; c2c, the London to Tilbury and Southend operation, won an award for meeting Swiss standards of punctuality, he says.

However, Lord Adonis, transport secretary, is determined to strip the company of that and the East Anglia contract as a punishment for handing back the East Coast line. Mr Devaney remains adamant the legal advice is that they “can’t be taken off us”.

A big hope is that the change of management at National Express, including Mr Devaney’s appointment, could soften Lord Adonis’ stance. It is widely held in the industry that there was personal animosity between sections of the Department for Transport and Mr Bowker, a former head of the Strategic Rail Authority, who played a crucial role in designing the franchise system.

Mr Devaney, who is also chairman of National Air Traffic Control Systems, says he spent a day with Lord Adonis at the traffic control centre in Swanick, which “he seemed to enjoy”. He’s a “very reasonable man”.

That does not stop Mr Devaney from being critical of the department for writing such tight specifications into the East Coast contract, which stifled any ability to cut costs to the extent that National Express could not add or subtract carriages, for example, according to demand.

The franchise system, he says, with his dry humour, “would take some trouble inventing”. The “only investment rail operators can make is to turnstiles and car parks”.

He suggests that even Lord Adonis “was surprised by the way it worked”. He thought that the public transport company had “promised to put money into the company ad nauseum but that’s not the way the system was set up”.

The system encourages overbidding, he says, and he concedes that National Express paid too much for the East Coast mainline.

The predators, on the whole, are thought to be more interested in National Express’s bus business than its remaining rail franchises, which are already roughly halfway through their contracts.

One offer from rival First Group has been rejected and withdrawn; and a second by the Cosmen family, an 18.2 per cent shareholder, and the CVC private equity group, is still on foot, but vague on detail – clearly frustrating Mr Devaney. In these circumstances, Mr Devaney asserts “the best deal at the moment is to fix the company” though he also says, “if someone comes in from the side with an attractive and unconditional offer we will consider it”.

……………………………….

Global ambition behind Spanish family’s success

If the acquisition of Spain’s Alsa in 2005 by National Express is at the root of its woes, then Jorge Cosmen, the deputy chairman representing the Cosmen family, which owns just under a fifth of the UK transport group, wants to be part of the solution, writes Mark Mulligan in Madrid.

The Cosmens come from the northern Spanish region of the Asturias, where they started a horse-and-carriage operation in 1728. This grew rapidly and Mr Cosmen’s father, José “Pepe”, is oft-cited in Spain as one of its pioneers of globalisation.

Best known for its old zinc and gold mines, picturesque fishing villages and shabby industrial ports, the Asturias is also home to Alsa, the Cosmen transport company that became a model to Spanish family enterprises and corporates.

The family’s involvement with National Express dates to 2003, when Phil White, the former chief executive, struck up a friendship with the Cosmens during the Rugby World Cup in Sydney. A £460m deal was completed in December 2005 and the family has since lifted its stake – originally about 13 per cent – to 18.6 per cent.

Jorge Cosmen, 41, is the fifth of eight siblings in what is the 11th generation of the family dedicated to the transport business.

In a 2007 speech he said: “My father read an article about a product for bronchitis that was being made in China, so he made inquiries at the Chinese embassy in Spain …He wound up signing a 10-year contract for a taxi licence in a region that was considered small in China, but has 60m inhabitants …It was 1984. [Ours] was the first foreign transport company authorised to operate in an Asia company.”

Andrés Cosmen, among the eldest of the siblings, was studying economics at the time, and opted instead to go to China. He now oversees operations based outside Beijing, including 14 joint ventures that are dedicated to mainly road passenger transport and bus terminus management.

Pepe, 81, handed over executive responsibilities in the 1990s and the children run the family business, which includes hotels, car dealerships and agriculture ventures.

In teaming up with private equity group CVC, Jorge is said to be considering a break up of National Express and taking back control of the Spanish operations. However, he will have to weigh up his options if the group manages to go ahead with a rights issue backed by other shareholders.