Announcement re: Rights Issue
THIS ANNOUNCEMENT (AND THE INFORMATION CONTAINED HEREIN) IS NOT FOR FORWARDING, RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO OR FROM THE UNITED STATES, CANADA, AUSTRALIA, JAPAN OR THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION
11 NOVEMBER 2009
NATIONAL EXPRESS GROUP PLC ANNOUNCES 7 FOR 3 RIGHTS ISSUE
TO RAISE NET PROCEEDS OF APPROXIMATELY £360 MILLION
The Board of National Express today announces a fully underwritten 7 for 3 Rights Issue to raise net proceeds of approximately £360 million, through the issue of up to 357,043,390 New Ordinary Shares.
Background to and reasons for the Rights Issue
The Group's strategy in recent years has been to develop its business organically and through selective, value enhancing acquisitions, whilst seeking to maximise returns to Shareholders through maintaining an efficient balance sheet. This has created a strong and diversified portfolio of transport businesses, most of which are demonstrating reduced sensitivity to the current economic environment.
However, the marked underperformance of the East Coast rail franchise, together with the Group's balance sheet carrying a higher level of debt following a period of growth and investment, has led the Board to conclude that a rights issue is in the best interests of Shareholders.
Update on East Coast handover
In a formal termination notice dated 4 November 2009, the DfT advised NXEC, the National Express East Coast franchise operator, that it intends to terminate the franchise agreement at 11.59 p.m. on 13 November 2009, whereupon the operation of the East Coast franchise will transfer to DOR, a company incorporated by the DfT for that purpose.
The Group's committed financial obligations in relation to the East Coast franchise are restricted to a £40 million subordinated loan to NXEC (which has now been fully drawn down), available to NXEC to maintain contractual liquidity ratios, and a performance bond to meet liabilities in the event of franchise default by NXEC, up to a maximum of approximately £32 million.
However, the Secretary of State for Transport has stated publicly that he believes the DfT may, following the termination of the East Coast franchise agreement, have grounds to terminate the National Express East Anglia and c2c franchise agreements by virtue of cross default provisions in these franchise agreements, thereby requiring the Group to return its remaining UK rail franchises ahead of the end of their current franchise terms.
National Express has taken and received advice from leading legal counsel upon its, and its subsidiaries', positions under the National Express East Coast and other franchise agreements. On the basis of that advice, National Express considers that it may have grounds to challenge any purported declaration by the DfT of cross default of the National Express East Anglia and c2c franchises on the basis of termination of the East Coast franchise agreement.
Whilst the Group will therefore oppose any attempt by the DfT to assert any purported right of cross default, it nonetheless remains open to further discussions with the DfT with the objective of safeguarding the interests of all stakeholders.
Reducing the Group's debt levels
The unprecedented turmoil and disruption in global financial markets has severely curtailed the availability of debt funding to businesses for new investment and refinancing. The Group currently has a level of debt that is above the UK transportation sector average.
The Group's net debt as at 30 September 2009 was approximately £1.1 billion. Taking into account the Group's level of debt, the Board undertook a comprehensive review of the options available to the Group to ensure that its balance sheet and funding position remain appropriate and robust. In particular, the Group has put in place a number of initiatives to maximise the cash generation from its businesses which the Board believes will generate over £100 million of incremental cash in 2009. As a result of these initiatives the Group has reduced its net debt by over £200 million in the first six months of 2009. In the absence of any assertion by the DfT of its rights of cross default in relation to the National Express East Anglia and c2c franchises, the Board believes that the majority of this improvement should be sustainable in the second half of the 2009 financial year.
However, self help measures can deliver only limited progress in reducing debt to a more appropriate level, particularly given the maturity of the Euro Bridge Facility in September 2010 (or March 2011, in an amount up to €270 million, following the Rights Issue) and the Sterling RCF in June 2011, both of which will require refinancing, of which there can be no certainty. In addition, it is unlikely that these measures alone will cause the Group's debt gearing ratio to fall below the limit of 3.5 times EBITDA required under the Facilities by the time this ratio is next tested as at 31 December 2009.
Rights Issue
The net underwritten proceeds of the Rights Issue, which will be received by the Group prior to the 2009 financial year end, will be used to pay down borrowings under the Group's Euro Bridge Facility. This will reduce the Group's debt gearing ratio to below 3.5 times EBITDA, ensuring compliance by the Group with its banking covenants when they are next tested as at 31 December 2009. In addition, the Group will be able to extend the maturity of the Euro Bridge Facility to March 2011, in an amount of up to €270 million.
The Board believes that the Rights Issue will therefore allow the Group to maintain appropriate covenant headroom in the near term whilst significantly reducing the Group's net debt position so as to support the Group's longer term objective of attaining investment grade equivalence, potentially allowing access to a broader range of financing markets and placing the Group in a stronger position to negotiate future debt refinancing requirements. The reduction in leverage will also provide the funding flexibility to pursue the Group's longer term strategic objectives and, the Board believes, maximise Shareholder value.
Whilst the Board has resolved to proceed with the Rights Issue, one of the directors, Mr. Jorge Cosmen, did not vote in favour of the relevant Board resolutions required in connection with its implementation. Mr. Cosmen has advised the Board that he feels, in accordance with his duties as a director of the Company, that the Rights Issue is not in the best interests of the Company and all Shareholders.
Notwithstanding the matters raised by Mr. Cosmen, the Board considers the Rights Issue to be in the best interests of the Group and Shareholders and therefore the most appropriate course of action for the Group to take in the near term.
John Devaney, Executive Chairman of National Express, commented:
"The launch of today's rights issue significantly reduces the Group's net debt to a more sustainable level and allows management to focus on value creation for shareholders rather than short term debt management.
"National Express continues to deliver resilient operating performance despite challenging trading conditions. Our strong cash generation has been restored and we are committed to achieving excellence in service delivery to all of our customers.
"We have substantial confidence in our future and believe that the actions we are taking to strengthen our balance sheet provide us with the flexibility to pursue the Group's longer term growth objectives and maximise shareholder value."
The Rights Issue is fully underwritten by: BofA Merrill Lynch and Morgan Stanley acting as Joint Sponsors, Joint Global Co-ordinators, Joint Bookrunners and Joint Lead Underwriters; Barclays Capital and RBS Hoare Govett acting as Co-Bookrunners and Underwriters; and BBVA, BNP PARIBAS, Commerzbank and HSBC as Co-Lead Managers and Underwriters. A prospectus concerning the Rights Issue is being sent to Shareholders. Further details of the Rights Issue are set out in Appendix I to this announcement and in the Rights Issue Prospectus, which will also be made available on National Express' website (http://www.nationalexpressgroup.com).
At an Extraordinary General Meeting of the Company to be held on 27 November 2009, Shareholders will be asked to approve resolutions in connection with the Rights Issue.
National Express will be hosting a conference call for analysts and institutional investors today at 8.30 a.m. The details of the conference call are as follows:
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Time: |
8.30 a.m. (GMT) |
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Live Number: |
+44 20 8609 0582 |
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Replay Number: |
+44 20 8609 0289 |
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Replay Reference Number: |
276359# |
Enquiries:
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National Express Group PLC |
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Jez Maiden |
+44 20 7506 4324 |
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Nicole Lander |
+44 121 460 8401 |
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Maitland (Financial PR) |
+44 20 7379 5151 |
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Neil Bennett |
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George Hudson |
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BofA Merrill Lynch |
+44 20 7628 1000 |
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(Joint Sponsor, Joint Global Co-ordinator, Joint Bookrunner and Joint Lead Underwriter to the Rights Issue) |
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Simon Mackenzie-Smith |
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Philip Noblet |
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Justin Anstee |
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Elliot Richmond |
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Simon Fraser (Corporate Broking) |
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Andrew Osborne (Corporate Broking) |
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Morgan Stanley |
+44 20 7425 8000 |
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(Joint Sponsor, Joint Global Co-ordinator, Joint Bookrunner and Joint Lead Underwriter to the Rights Issue) |
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Matthew Jarman |
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Peter Moorhouse (Corporate Broking) |
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Edward Knight (Corporate Broking) |
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The defined terms set out in the Appendix apply in this announcement. Unless otherwise stated references to time contained in this announcement are to UK time. This announcement has been issued by and is the sole responsibility of National Express Group PLC.
APPENDIX I
THE RIGHTS ISSUE
Introduction
The Board has announced today that it proposes to raise approximately £360 million (net of expenses) by way of a fully underwritten 7 for 3 Rights Issue.
The Rights Issue will result in the issue of up to 357,043,390 New Ordinary Shares at a price of 105 pence per New Ordinary Share (which represents a 68.9 per cent. discount to the closing middle market price per Ordinary Share on 10 November 2009, the latest practicable date before the announcement of the Rights Issue).
The New Ordinary Shares to be issued under the Rights Issue, when fully paid, will rank pari passu with the Existing Ordinary Shares including the right to all future dividends and other distributions declared, made or paid after the date of the Rights Issue Prospectus. Merrill Lynch and Morgan Stanley & Co. International plc are acting as Joint Sponsors to National Express and Joint Global Co-ordinators and Joint Bookrunners in relation to the Rights Issue and Merrill Lynch and Morgan Stanley Securities Limited, together with the Co-Bookrunners and the Co-Lead Managers are underwriting the Rights Issue.
In view of the requirement to seek authority from Shareholders in connection with the Rights Issue, an Extraordinary General Meeting has been convened for 11.00 a.m. on 27 November 2009.
The purpose of this announcement is to provide you with certain details of, background to and reasons for the Rights Issue and to explain why the Board strongly believes the Rights Issue is in the best interests of the Company and Shareholders as a whole. The Board recommends that you vote in favour of the Resolutions set out in the Notice of EGM at the end of the Rights Issue Prospectus.
Shareholders should read the whole of the Rights Issue Prospectus, including information incorporated by reference, and not just rely on the information summarised in this announcement.
Further details will be set out in the Rights Issue Prospectus, which is being published by the Company today and which will also be made available on National Express' website (http://www.nationalexpressgroup.com).
Application will be made to the UK Listing Authority and to the London Stock Exchange for the New Ordinary Shares to be admitted to the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission will become effective and that dealings in the New Ordinary Shares (nil paid) on the London Stock Exchange will commence at 8.00 a.m. on 30 November 2009.
BACKGROUND TO AND REASONS FOR THE RIGHTS ISSUE
The Group's strategy in recent years has been to develop its business organically and through selective, value enhancing acquisitions, whilst seeking to maximise returns to Shareholders through maintaining an efficient balance sheet. This has created a strong and diversified portfolio of transport businesses, most of which are demonstrating reduced sensitivity to the current economic environment. During the current financial year the Group has seen resilient revenues in bus markets in the UK and North America, and has utilised its flexibility to manage costs and services in its coach businesses in the UK and Spain, as well as benefiting from government revenue support in its National Express East Anglia rail franchise.
However, marked underperformance in the National Express East Coast rail franchise, together with the Group's balance sheet carrying a higher level of debt following a period of growth and investment, has led the Board to conclude that a Rights Issue is in the best interests of Shareholders.
Background to the Rights Issue
The previous period of investment by National Express has enhanced the Group's scale and potential, creating a strong platform for future value generation. Creation of the Group's Spanish business through the purchase of the ALSA business in 2005 and the addition of Continental Auto in 2007 has resulted in the Group being the number one privately operated public transport business in Spain, generating a normalised operating profit from continuing operations in 2008 of over €100 million. Investment in North America in the Business Transformation programme is targeted to deliver cost efficiencies and new service offerings in the future. Selective expansion in UK Coach has helped create the only truly national coach operator in the country. These investments continue to offer a strong, cash and value generating future for the Group.
National Express funded this expansion with debt. This was backed by profits from these core businesses, as well as from the profits of the Group's rail businesses, in which National Express has built a strong operational reputation. While the Group's level of debt was not atypical for a listed UK company during a period when debt was readily available, the current above average debt level has been more difficult to sustain due to a combination of significant restrictions in global credit availability over the past 12 months, and a significant reduction in the profits National Express generates, particularly from its UK rail businesses.
Reduced rail profitability
National Express operates three UK rail franchises. National Express East Anglia has been operated by the Group since 2004. As the National Express East Anglia franchise is over four years old, it qualifies for revenue support from the DfT of up to 80 per cent. of any revenue shortfall against a predetermined target. This gives important protection to the Group since it limits the Group's exposure to any decrease in franchise revenues in circumstances where passenger traffic and fare yields are falling, as has been the case during the past 12 months. Whilst the Group's c2c rail franchise does not benefit from revenue support it has remained profitable through the current recession.
However, the recent economic recession has had a significant impact on the financial performance of the East Coast franchise. The Group commenced operating the franchise in December 2007, and its terms do not provide for revenue support from the DfT in the event of a revenue shortfall until December 2011. As a result, the Group has been limited in its ability to manage the financial impact of a slowing in revenue on the East Coast franchise, where a substantial fixed cost base results in significant operational gearing. At the time of the franchise bid in 2007, it had been assumed by the Group that the compound annual growth rate for passenger revenue in the East Coast franchise would be slightly above 10 per cent. based on assumptions at that time in relation to passenger numbers, GDP growth and yield. In the 2008 financial year, the first full year of the operation of the East Coast franchise by National Express, passenger revenue grew by 9 per cent. In the first 9 months of the 2009 financial year, passenger revenue declined by 2 per cent. With limited ability to reduce operating costs, the East Coast franchise has become loss-making in 2009.
Reflecting NXEC's (the special purpose vehicle which operates National Express East Coast franchise) substantial operating loss reported in the first six months of 2009, NXEC undertook extensive discussions with the DfT to explore opportunities to manage the impact of the recession on the East Coast franchise. However, despite these extensive discussions, it did not prove possible to agree a solution with the DfT that would meet the needs of all stakeholders. In the absence of any such agreement, National Express has advised the DfT that it would encourage NXEC to continue to operate its franchise on all its existing terms, with the parental support that National Express agreed to provide at the time that the franchise was awarded to NXEC. Following the full utilisation of the Group's committed financial support it was expected that NXEC would remain solvent until later in the fourth quarter of the 2009 financial year, depending on trading conditions. National Express also advised the DfT that it would continue to work closely with the DfT within its existing funding commitments, in order to ensure high standards of passenger service delivery by NXEC and to ensure an orderly handover of the franchise when that financial support had been fully extinguished.
Although NXEC currently remains solvent, the DfT has notified NXEC that, as a result of the forward looking liquidity ratios that NXEC is obliged to comply with under the terms of the franchise agreement falling below the levels required by the franchise agreement, the DfT regards NXEC as being in default under the franchise agreement. In a formal termination notice dated 4 November 2009, the DfT advised NXEC that it intends to terminate the franchise agreement at 11.59 p.m. on 13 November 2009, whereupon the operations of the East Coast franchise will transfer to DOR, a company incorporated by the DfT for that purpose.
Implications of East Coast handover
The Group's committed financial obligations in relation to the East Coast franchise are restricted to a £40 million subordinated loan to NXEC (which has now been fully drawn down), available to NXEC to maintain contractual liquidity ratios, and a performance bond to meet liabilities in the event of franchise default by NXEC, up to a maximum amount of approximately £32 million.
In addition, the Board believes that, based on past experience in relation to the handover of UK rail franchises, the Group will be entitled on handover of the East Coast franchise to recover the net book value of the fixed assets of NXEC from DOR, the incoming franchisee, in accordance with the normal arrangements for a transfer scheme. As at 30 September 2009, the value of these fixed assets was approximately £30.8 million. Upon transfer, NXEC will also be required to settle outstanding working capital balances, including deferred season ticket receipts as well as NXEC's liability to repay a £16.6 million external bank loan (which is not guaranteed by any other member of the Group). The net cash outflow from the Group in relation to the transfer of NXEC will therefore depend on the value ascribed to its fixed assets, the value of the relevant season ticket bonds and the working capital position of NXEC at the time of transfer.
As at 30 September 2009 the value of the season ticket bonds in relation to NXEC was approximately £4.9 million and the Board estimates that NXEC had a working capital balance of approximately £8.9 million. For illustrative purposes, had a transfer of the East Coast franchise taken place as at 30 September 2009, the net cash outflow from the Group would have been approximately £0.4 million.
However, there can be no assurance as to the basis on which these cash balances will be settled upon the handover of the East Coast franchise. In addition, the DfT may recover losses it alleges may arise from early termination and handover of the East Coast franchise from NXEC as the counterparty to the franchise agreement, although NXEC may not have sufficient assets to satisfy the value of any such claim. Notwithstanding this, based on legal advice regarding the limited nature of the Group's financial obligations in relation to the East Cost franchise, the Board does not believe that the DfT would be entitled to recover any losses that the DfT may allege arise from early termination and handover of the East Coast franchise from any other member of the Group other than NXEC.
Under the DfT's model for franchise bidding, the Group's financial obligations under the National Express East Coast franchise are strictly limited. In accordance with the requirements of that model, NXEC is a special purpose vehicle, set up to meet the DfT's requirement as a standalone legal entity, with its own assets, management team and franchise agreement with the DfT. Neither National Express Group PLC nor any other member of the Group is a party to, or a guarantor of, NXEC's obligations under the East Coast franchise agreement. The Board believes that the Group has no further financial obligations to the DfT in respect of the East Coast franchise, or to NXEC, other than the commitments to provide a subordinated loan of £40 million and a performance bond of £32 million, as described above.
In the DfT's notification to NXEC that the East Coast franchise will terminate at 11.59 p.m. on 13 November 2009, the DfT indicated that it will write separately to the Group's remaining UK rail franchises, National Express East Anglia and c2c, to reserve its rights in relation to cross default provisions contained in the National Express East Anglia and c2c franchise agreements. These provisions may allow the DfT to terminate the relevant franchise agreement in circumstances where there has been a termination as a result of default under another franchise operated by a TOC within the same ownership group and which the Secretary of State considers is material. Moreover, the Secretary of State for Transport has stated publicly that he believes the DfT may, following the termination of the East Coast franchise agreement, have grounds to terminate the National Express East Anglia and c2c franchise agreements by virtue of these cross default provisions, thereby requiring the Group to return its remaining UK rail franchises ahead of the end of their respective franchise terms.
National Express has taken and received advice from leading legal counsel upon its, and its subsidiaries', positions under the National Express East Coast and other franchise agreements. On the basis of that advice, National Express considers that it may have grounds to challenge any purported declaration by the DfT of cross default of the National Express East Anglia and c2c franchises on the basis of termination of the East Coast franchise agreement.
The Board believes that cross default can only lawfully be applied where the Secretary of State for Transport can reasonably consider that the default under one franchise within an owning group has a material impact on the other franchises within that group. The Group further believes that the Secretary of State for Transport would have no valid grounds on which to come to this conclusion in circumstances where the Group has satisfied in full all of the parental support obligations to which the DfT asked it to commit at the time of tendering the East Coast franchise and awarding it to NXEC, and will continue to do so for both National Express East Anglia and c2c.
Whilst the Group will therefore oppose any attempt by the DfT to assert any purported right of cross default, it nonetheless remains open to further discussions with the DfT with the objective of safeguarding the interests of all stakeholders.
In the event that the DfT did successfully exercise its right of cross default in relation to the National Express East Anglia and c2c franchises, or the Group were to agree with the DfT that it would cease operating these franchises before the end of their respective franchise terms, the Group's additional committed financial obligations would be restricted to the value of a £20 million subordinated loan made available to National Express East Anglia in order to maintain contractual liquidity ratios (but which has not been drawn on and which the Board does not expect to be drawn at any time in the near future, based on current trading and the effect of revenue support from the DfT), as well as the performance bonds made available by the Group in relation to each of the National Express East Anglia and c2c franchises. The value of these performance bonds is approximately £26 million (National Express East Anglia: £21.8 million; c2c: £4 million).
In addition, the Board believes that the Group would be entitled to recover the net book value of the fixed assets of the National Express East Anglia and c2c franchises from the incoming franchisee(s), in accordance with the normal arrangements for a transfer scheme. As at 30 June 2009, the value of these fixed assets was approximately £21.8 million (National Express East Anglia: £14.0 million; c2c: £7.8 million). Upon transfer, the National Express East Anglia and c2c TOCs would also be required to settle outstanding working capital balances, including deferred season ticket receipts. The net cash outflow from the Group in relation to the transfer the National Express East Anglia and c2c franchises would therefore depend on the value ascribed to their respective fixed assets, the values of the relevant season ticket bonds and the working capital position of each TOC at the time of transfer.
As at 30 June 2009 the aggregate value of the season ticket bonds in relation to these franchises was approximately £63 million (National Express East Anglia: £48.1 million; c2c: £14.9 million) and the franchises had an aggregate working capital balance of approximately £103.3 million (National Express East Anglia: £77.6 million; c2c: £25.7 million). For illustrative purposes, had a transfer of the National Express East Anglia and c2c franchises taken place as at 30 June 2009, the net cash outflow from the Group would have been approximately £81 million. However, there can be no assurance as to the basis on which these cash balances would be settled upon any handover of these franchises.
Reducing the Group's debt levels
The unprecedented turmoil and disruption in global financial markets has severely curtailed the availability of debt funding to businesses for new investment and refinancing. The Group currently has a level of debt that is above the UK transportation sector average. In April 2007, the Group acquired Continental Auto for approximately €659 million. The Group chose to finance the acquisition with a €540 million Euro Bridge Facility, given the attractive terms made available by lenders at that time and the Group's intent to refinance the Euro Bridge Facility through the bank and capital markets. In addition to this acquisition-related increase in net debt, the Group has undertaken an extensive investment programme in recent years to support future growth, which has also served to increase the net debt position.
For reference, the Group's material banking facilities are set out in the table below:
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Facility |
Maturity |
Covenants |
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€540m Euro Bridge Facility |
September 2010(1) |
Net Debt to EBITDA: 3.5:1 EBITDA to Net Interest Payable: not less than 3.5:1 |
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£800m Sterling RCF |
June 2011 |
Net Debt to EBITDA: 3.5:1 EBITDA to Net Interest Payable: not less than 3.5:1 |
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The Company has the right to extend the maturity date under the Euro Bridge Facility to March 2011, subject to a reduction in borrowings under this facility to €270 million and the Group's debt gearing ratio falling to below 2.75 times EBITDA (on a pro-forma basis, based on the Group's financial statements as at 30 June 2009), in each case on or prior to 18 December 2009.
As at 30 September 2009, the Group's net debt was approximately £1.1 billion. Of this, approximately €520 million has been drawn down under the Euro Bridge Facility and £585 million has been drawn down under the Sterling RCF.
Taking into account the Group's level of debt, the Board undertook a comprehensive review of the options available to the Group to ensure that its balance sheet and funding position remain appropriate and robust.
In particular, the Group has put in place a number of initiatives to maximise the cash generation from its businesses which the Board believes will generate over £100 million of incremental cash in 2009. These include effective management of capital investment, with a reduced expenditure reflecting fewer short-term expansion opportunities and carefully targeted asset maintenance spend, delivering opportunities to reduce working capital, through more focused management of receivables and payables within each business, suspension of dividend payments until a manageable debt level is re-established, together with disposal of non-core businesses and assets. In the first half year of 2009, net capital expenditure was reduced by over 40 per cent., working capital was reduced during the period by £47 million and the Group's Travel London bus business was sold for £32 million. The Group has also recently raised approximately £15 million in a sale and leaseback of its new flagship coach and office facility in Birmingham and will continue to consider further disposals, if appropriate values can be realised, as a way of reducing its net debt position.
The Group also undertook a comprehensive review of its borrowing arrangements with its principal lending banks through which it secured the retention of the debt gearing ratio limit of 4.0 times EBITDA under the Facilities for the 30 June 2009 test date, which provided additional covenant headroom (although the covenant for the current measurement period, ending on 31 December 2009, will reduce to 3.5 times EBITDA). In addition, the Group has agreed with the Facilities' providers a change in the calculation of net debt for covenant purposes to use average foreign currency rates, rather than spot, thereby reducing foreign exchange rate volatility. The Group paid a one-off fee of 0.5 per cent. of the Facilities to achieve the amendments.
It has also been agreed that the Group will have the right to extend the maturity date under the Euro Bridge Facility to March 2011, subject to a reduction in borrowings under this facility to €270 million prior to 18 December 2009. The net proceeds of an underwritten equity fundraising announced by the Company prior to 18 December 2009, such as the Rights Issue, will be taken into account for these purposes, provided such fundraising becomes unconditional before 28 February 2010 and the underwritten proceeds of the fundraising are received by the Group by not later than 31 March 2010 (i.e. if not, the maturity of the Euro Bridge Facility reverts to September 2010). In the event that the Company becomes entitled to extend the maturity of the Euro Bridge Facility to March 2011, the margin payable on borrowings under the residual Euro Bridge Facility will increase to 3 per cent. per annum (which is the maximum potential margin per annum under the Euro Bridge Facility until March 2011, if the Facility is extended to this date).
However, because the Group's debt gearing ratio did not fall to 2.75 times EBITDA by 30 September 2009, the interest rates payable under both Facilities have been subject to a margin increase of 1 per cent. and the margin will increase by a further 0.5 per cent. if this ratio (on an actual basis) is not achieved as at 31 December 2009.
As a result of cash management initiatives, the Group has reduced its net debt by over £200 million in the first six months of 2009. In the absence of any assertion by the DfT in relation its rights of cross default in relation to the National Express East Anglia and c2c franchises, the Board believes that the majority of this improvement should be sustainable in the second half of the 2009 financial year. However, self help measures can deliver only limited progress in reducing debt to a more appropriate level, particularly given the maturity of the Euro Bridge Facility in September 2010 (or March 2011, in an amount up to €270 million, following the Rights Issue) and the Sterling RCF in June 2011, both of which will require refinancing, of which there can be no certainty. In addition, it is unlikely that these measures alone will cause the Group's debt gearing ratio to fall below the limit of 3.5 times EBITDA required under the Facilities by the time this ratio is next tested as at 31 December 2009.
Given the lower level of the Group's profits, the Board has identified the Rights Issue as being the most appropriate method by which to avoid a breach of the Group's banking covenants in the near term and to build on progress to date, and to achieve a significant reduction in net debt, thereby better aligning it with the profitability and debt supporting capacity of National Express in the longer term.
Possible offers for the Group
The ability of the Group to implement the above measures aimed at reducing its debt levels has been affected by a number of recent approaches that have been made regarding possible offers for the Group. In particular, the launch of the Rights Issue has been delayed whilst the Board gave due consideration to these approaches, which are summarised below:
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On 19 June 2009 the Group received a highly preliminary approach regarding a potential share for share merger on unspecified terms from FirstGroup. Given the unspecified terms of FirstGroup's proposals and the Board's focus on implementing its own initiatives to strengthen the Group's balance sheet, the approach was rejected by the Board. On 22 July 2009, FirstGroup announced that it did not intend to make an offer for National Express, save for in certain limited circumstances in accordance with Rule 2.8 of the Takeover Code.
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On 27 July 2009, the Group announced that it had received an approach from a consortium comprising funds advised by CVC Capital Partners Limited and interests of the Cosmen family (the ''Consortium'') relating to a cash offer for the Company. This proposal was subject to a number of pre-conditions and assumptions, including: retention, following a change of control of the Group, of the National Express East Anglia and c2c franchises; extension of the National Express East Anglia franchise period to April 2014; the receipt of bank financing on appropriate terms; and satisfactory completion of due diligence. On the same date, Stagecoach also announced that it was considering its options in relation to National Express and that it had entered into exclusive discussions with the Consortium regarding the possible acquisition by Stagecoach of certain businesses and assets of the Group in the event of the Group being acquired by the Consortium.
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Following representations made by the Group and its advisers, on 5 August 2009 the Takeover Panel announced that each of the Consortium and Stagecoach must, by 11 September 2009 (the ''Put-up or Shut-up Deadline''), either announce a firm intention to make an offer for the Group or announce that it does not intend to make an offer for the Group.
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On 27 August 2009, the Group announced that it had received a revised proposal from the Consortium to acquire the entire issued and to be issued share capital of National Express for 450 pence per share. Following this announcement, on 3 September 2009 the Consortium submitted a revised proposal, increasing its proposed offer price to 500 pence per share. In an announcement also dated 3 September 2009 the Consortium confirmed that this was its final offer and that its offer price per share would not be reduced or increased.
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In a further announcement also made on 3 September 2009, Stagecoach confirmed that it remained in exclusive discussions with the Consortium and that an agreement of principles had been reached regarding the possible acquisition by Stagecoach of the Group's UK bus and continuing UK rail operations from the Consortium. In light of this, Stagecoach's announcement further confirmed that it did not intend to make a formal offer in its own right for National Express, save for in certain limited circumstances in accordance with Rule 2.8 of the Takeover Code.
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On 11 September 2009, National Express announced that after consultation with its advisers and major institutional shareholders, it had agreed that the Consortium could undertake due diligence in relation to the Group. National Express subsequently supported certain extensions to the original Put-up or Shut-up Deadline, as it then applied to the Consortium, such that the Consortium was better able to reach a position where it could make a formal offer for the Group to National Express shareholders at 500 pence per share in cash.
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On 16 October 2009, the Consortium announced that it had subsequently decided not to make an offer for National Express. That announcement also stated that it was now the intention of the Cosmen family to support the Company's plans to undertake an equity fundraising within certain parameters that the Cosmen family had communicated to the Board of National Express.
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Following the announcement by the Consortium on 16 October 2009 that it did not intend to make an offer for the Group, the Board received a highly preliminary proposal from Stagecoach to acquire the Group in an all-share transaction, with National Express Shareholders owning no more than 40 per cent. of the enlarged group. Stagecoach confirmed in its proposal that further work and analysis was required to determine a precise exchange ratio, the extent to which any equity issued once for cash was required and appropriate disposals of businesses.
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On 28 October 2009, the Group announced that the Board, together with its advisers, had evaluated the value and certainty of the Stagecoach proposal. As part of this process, the Group's advisers had met with Stagecoach's advisers to discuss due diligence requirements, the timing and feasibility of obtaining debt financing for the enlarged group, the requirement for future equity issuance and necessary disposals. The Board concluded that it was unlikely that a combination with Stagecoach could be successfully executed in 2009, even if appropriate terms could be agreed. Accordingly, in order to avoid any further disruption to the business and to allow the Group to secure the additional equity funding it requires before the end of 2009, the Board confirmed that all discussions with Stagecoach had ceased.
European Express Enterprises Limited
EEEL is the corporate entity which holds the majority of the Cosmen family's shareholding in National Express. The Cosmen family is the Group's largest shareholder. EEEL was part of the Consortium that approached the Group in relation to a possible offer for National Express.
Pursuant to the terms of the Relationship Agreement entered into between the Company and EEEL on 11 October 2005 in connection with the Company's acquisition of ALSA, EEEL has the right to appoint one non-executive director to the Board. The current EEEL appointed director on the National Express Board is Jorge Cosmen, who was appointed in December 2005.
On 30 October 2009, EEEL announced that, amongst other things, it had ''serious concerns about the absence of a well-defined strategy to address the Company's broader and longer-term issues''. EEEL also stated its concern ''that there has not been a sufficiently full and thorough assessment of all the available options to address the Company's short and longer-term challenges, and, in particular of Stagecoach Group plc's merger proposal, an option that could have addressed the fundamental financial and strategic issues facing the Company''.
On the same date, and in response to the announcement from EEEL, the Board reiterated its belief that the best course of action for the Group and all shareholders was to proceed with an equity fundraising to secure funds before year end, given the significant risk of non-compliance with its 31 December 2009 banking covenants.
The Board confirmed that it, together with its independent advisers, had carefully explored a range of strategic options during the course of 2009. In relation to the recent Stagecoach proposal the Board concluded that there was significant uncertainty that a combination with Stagecoach could be successfully executed in 2009.
Rights Issue
In July 2009, the Board highlighted the need to strengthen the Group's balance sheet to reduce debt and maintain compliance with its banking covenants from December 2009. Non compliance with its banking covenants when they are next tested as at 31 December 2009 would require the Group to seek further concessions from its banking partners, incurring additional cost and creating significant uncertainty for Shareholders.
The Board believes that the Rights Issue will allow the Group to maintain appropriate covenant headroom in the near term whilst significantly reducing the Group's net debt position so as to support the Group's longer term objective of attaining investment grade equivalence, potentially allowing access to a broader range of financing markets and placing the Group in a stronger position to negotiate future debt refinancing requirements. The reduction in leverage will also provide the funding flexibility to pursue the Group's longer term strategic objectives and, the Board believes, maximise Shareholder value.
Accordingly, the Board considers the Rights Issue to be in the best interests of the Group and Shareholders and therefore the most appropriate course of action for the Group to take in the near term.
MATTERS RAISED BY JORGE COSMEN
Whilst the Board has resolved to proceed with the Rights Issue, one of the directors, Mr. Jorge Cosmen, did not vote in favour of the relevant Board resolutions required in connection with its implementation. Mr. Cosmen has advised the Board that he feels, in accordance with his duties as a director of the Company, that the Rights Issue is not in the best interests of the Company and all Shareholders.
The Board considers it important to explain to Shareholders the reasons Mr. Cosmen expressed for his assessment, as conveyed to the Board by Mr. Cosmen at a Board meeting on 6 November 2009. They are reproduced below:
It is Mr. Cosmen's opinion that the Group has experienced disappointing performance in recent years and that it currently lacks strong management, a clear strategy, and long term financial security. Mr. Cosmen's belief is that the Group should not pursue the Rights Issue in isolation as it is, in his opinion, not the best solution for the Company and Shareholders to confront the Group's short and long term challenges. He does, however, recognise that a rights issue, combined with a more comprehensive package, could form part of a better solution to these challenges.
In Mr. Cosmen's opinion, the requirement to recapitalise the Group ahead of 31 December 2009, the next date as at which the Group's bank covenants are tested, is an artificial deadline. This is based on Mr. Cosmen's belief that lending banks have behaved rationally in every precedent situation, even when dealing with companies in much more serious financial difficulty. Mr. Cosmen believes that bank covenant amendments and maturity extensions in relation to debt facilities as a pre-condition to rights issues have become the norm. As Mr. Cosmen also believes that the Group will have to refinance the Facilities on less attractive terms when they reach maturity, he considers that the Group will therefore incur incremental interest expense in the near future in any event.
Mr. Cosmen has advised the Board that, in his opinion, unless a more material amendment/ extension exercise is undertaken now in relation to the Facilities, the Group risks jeopardising any refinancing next year by completing a large rights issue in isolation. In Mr. Cosmen's opinion, this is because the Group may not be in a position to return to the equity markets next year for a second time, if required.
Mr. Cosmen urged the Board to consider again that there could be a benefit to taking more time (in his belief, at minimal incremental interest cost when compared to the costs of a rights issue) to explore all options available to the Group (including the possibility of a strategic or asset transaction and/or new management and/or a new strategy), with the benefit of independent advice. It was Mr. Cosmen's view that then, and only then, should the Board be comfortable that it is truly preserving and protecting Shareholder value in recommending the Rights Issue.
For the avoidance of doubt, Mr. Cosmen has joined with the Company and the other Directors in accepting responsibility for the information contained in the Rights Issue Prospectus.
Notwithstanding the matters raised by Mr. Cosmen, the Board considers the Rights Issue to be in the best interests of the Group and all Shareholders and therefore the most appropriate course of action for the Group to take in the near term.
USE OF PROCEEDS
The net underwritten proceeds of the Rights Issue will be used to pay down borrowings under the Euro Bridge Facility. This will reduce the Group's debt gearing ratio to below 3.5 times EBITDA, in compliance with the Group's banking covenants, which are next tested as at 31 December 2009. In addition, by paying down borrowings under the Euro Bridge Facility, the Group will be able to extend the maturity of the Euro Bridge Facility to March 2011, in an amount of up to €270 million. This significant decrease in the Group's net debt position, together with the other steps being taken by the Group in relation to the strengthening of the Group's balance sheet (as outlined above), will considerably improve the Group's credit profile.
DIVIDEND POLICY
In 2008, the Board set a policy to increase dividends by 10 per cent. per annum for three years. Since then, global economic and financial conditions have changed substantially and despite strong earnings cover from the Group's core businesses (excluding the loss making East Coast franchise), an increasing dividend places a significant cash drain on the Group at a time when the Board believes it is more appropriate to conserve cash resources.
The Board therefore reduced the full year dividend for the 2008 financial year by 40 per cent. from the 2007 level, in order to benefit the Group's policy of debt reduction. While the Group's debt reduction programme is progressing well, in light of the requirement to ensure continued compliance with banking covenants and to refinance the Group's debt Facilities, the Board decided that it would not be appropriate to pay a 2009 interim dividend.
Given the longer term cash generative nature and earnings potential of the Group's operations, the Board expects to resume a progressive dividend policy once the economic outlook is clearer and the Group has refinanced its core banking Facilities in accordance with the Board's debt funding policy of attaining investment grade equivalence.
PRINCIPAL TERMS AND CONDITIONS OF THE RIGHTS ISSUE
The Company is proposing to raise approximately £360 million (net of expenses), by way of the Rights Issue. The Rights Issue is being fully underwritten by the Underwriters. The Issue Price of 105 pence per New Ordinary Share represents a 68.9 per cent. discount to the closing middle market price of National Express of 338 pence per Ordinary Share on 10 November 2009, the latest practicable date before the announcement of the Rights Issue.
Subject to the fulfilment of, amongst other things, the conditions set out below, the Company will offer up to 357,043,390 New Ordinary Shares by way of the Rights Issue to Qualifying Shareholders other than, subject to certain exceptions, Qualifying Shareholders with a registered address in the Restricted Jurisdictions, at an Issue Price of 105 pence per New Ordinary Share payable in full on acceptance. The Rights Issue will be offered on the basis of:
7 New Ordinary Shares for every 3 Existing Ordinary Shares
held on the Record Date, and so in proportion to any other number of Existing Ordinary Shares then held and otherwise on the terms and conditions set out in the Rights Issue Prospectus and, in the case of Qualifying non-CREST Shareholders only (except certain Overseas Shareholders), the Provisional Allotment Letter. Holdings of Ordinary Shares in certificated and uncertificated form will be treated as separate holdings for the purpose of calculating entitlements under the Rights Issue.
Entitlements to New Ordinary Shares will be rounded down to the nearest whole number and any resulting fractional entitlements to New Ordinary Shares will be disregarded.
The New Ordinary Shares will, when issued and fully paid, rank pari passu in all respects with the Existing Ordinary Shares including the right to all future dividends and other distributions declared, made or paid after the date of the Rights Issue Prospectus.
The Rights Issue is conditional, amongst other things, upon:
-
the passing of the Resolutions (without amendment) at the EGM on 27 November 2009 (and not, except with the prior written agreement of Merrill Lynch, Morgan Stanley & Co International plc and Morgan Stanley Securities Limited, acting jointly and in good faith (on behalf of the Banks), at any adjournment of such meeting);
-
Admission occurring no later than 8.00 a.m. on 30 November 2009 (or such later time and/or date (not later than 1 December 2009) as the Company and Merrill Lynch, Morgan Stanley & Co International plc and Morgan Stanley Securities Limited (on behalf of the Banks) may agree);
-
each condition to enable the Nil Paid Rights and the Fully Paid Rights to be admitted as a participating security in CREST (other than Admission) being satisfied on or before 30 November 2009); and
-
the Underwriting Agreement becoming unconditional in all respects (save for the condition relating to Admission) and not having been rescinded or terminated in accordance with its terms prior to Admission.
Applications have been made to the FSA and to the London Stock Exchange for the New Ordinary Shares to be admitted, nil paid, and fully paid, to the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission will become effective and dealings in the Nil Paid Rights will commence on 30 November 2009.
CURRENT TRADING AND PROSPECTS
Trading conditions remained difficult during the third quarter of 2009 with revenue slowing in a challenging economic environment. However, the Group continues to deliver a resilient operating performance. Cost saving programmes are on track to deliver £50 million of annualised savings. The Group is focused on achieving excellence in service delivery and the Group's self help programme is providing sustainable improvements in cash management.
Overall, the Board anticipates that the Group's normalised profit before tax for the current year will be slightly below its expectations at the half year. This reflects higher interest costs, following an increase in debt margin from October 2009, together with reduced profitability in North America from additional costs. Retained operations in the UK and Spain continue to perform resiliently.
Total Group continuing revenue in Sterling terms in the third quarter was 1 per cent. lower than the corresponding period in 2008. In the 2009 year to the end of the third quarter, Group total continuing revenue in Sterling terms rose by 3 per cent. With economic conditions remaining weak, revenue growth has slowed across all businesses. In underlying terms during the 2009 year to the end of the third quarter, UK Bus grew at 2 per cent., despite unemployment in Birmingham of over 12 per cent. Rail saw 1 per cent. growth in East Anglia and a solid performance in c2c, supported by increasing Olympic site traffic. North America grew at 4 per cent. UK Coach underlying revenue was flat in the first nine months of 2009, while Spain was 5 per cent. lower in the same period.
The Group has successfully implemented cost reduction plans to help mitigate the impact of declining GDP and rising unemployment on revenues. This has focused on two key factors: reducing vehicle operating mileage to match demand and rationalising overhead costs. Operating mileage has been reduced across Bus and Coach operations to counter the impact of lower passenger traffic. This has been particularly successful in relation to the Group's Spanish business, reducing operating kilometres by 9 per cent. in the third quarter of 2009, ahead of the adverse revenue impact. The Group's UK Coach business has an adaptable model, where the majority of coach provision is outsourced to third party operators. This has allowed the business to be flexible in relation to service provision while closely controlling cost, thereby improving margin year-on-year. In UK Rail, the focus has been on improved productivity and cost control. East Anglia has secured a wage cost settlement totalling 3.5 per cent. over two years, while revenue support, where 80 per cent. of any shortfall is met by the DfT, also benefits this franchise.
All businesses are focused on delivering cost reduction through more efficient staffing and indirect cost savings. UK reorganisation was already delivering benefits in 2009 and a move to a simpler organisational structure is expected by the Board to see a total of £25 million of annualised benefits delivered by the end of 2009. The Group's Spanish business continues to reduce its cost base, with over €20 million of annual savings expected to be delivered by the 2009 year end, through changes in contracts, productivity improvements and reducing structural costs. This programme has reduced profit erosion during the recession, whilst positioning the business at a lower cost base to benefit from medium term economic recovery.
The Group's North America business has begun to make progress in reducing overall driver wages, the principal cost in service delivery, reducing continuing costs as a proportion of continuing revenue by 2 per cent. in the first full month of the new school year when compared to the same month in 2008. However, additional costs, mostly due to a planned extension of the Business Transformation programme to reduce delivery risk and manage cashflow more effectively, together with previously reported contract reductions, are adversely impacting profitability during the current financial year, which is expected to be behind profitability for the 2008 financial year in Sterling terms.
In terms of service delivery, despite recessionary conditions, the Group has continued to deliver service improvements. The UK Coach business will open its brand new Birmingham coach station on time and ready for Christmas travellers. Stansted airport routes have returned to year-on-year growth, leveraging the Group's new modern airport ticketing facility. Dedicated events traffic has continued to grow through the summer of 2009, with 12 per cent. growth in Wembley travel. In relation to the Group's UK Bus business, quality partnerships are allowing the Group to develop tailored plans with local authorities to match changing customer demand. The Group's latest partnership in South Birmingham launched on 25 October 2009. In relation to the Group's UK Rail businesses, National Express East Anglia and c2c have continued to deliver record service performance, with c2c delivering a Public Performance Measure (PPM) on a Moving Annual Average (MAA) basis of 95.9 per cent. to 17 October 2009. c2c has recorded first place in UK rail franchises for PPM since March 2009 and has also achieved first place for franchised train operating companies for overall satisfaction in the National Passenger Survey (2009). East Anglia achieved a PPM (MAA) of 91.0 per cent. to 17 October 2009, the highest level since the franchise was awarded.
Through its multi-million pound investment partnership with the DfT, National Express East Anglia will also deliver 28,000 extra seats per week from December 2009, as part of the roll out of 188 extra carriages into service by December 2011. National Express East Anglia has also achieved all its operational performance criteria in respect of the three year franchise extension from April 2011 to April 2014 but because of the anticipated termination of the National Express East Coast franchise prior to 14 November 2009 the Group will lose the right automatically to obtain this extension and any extension will therefore be at the sole discretion of the DfT.
Ongoing losses in relation to the East Coast franchise have been charged against the contract exit provision established at the 2009 half year. In Spain, reduced summer holiday travel has adversely impacted long distance routes, while regional and urban services have seen smaller adverse revenue impacts. The Group has also recently launched its new Clase Eurobus service between Asturias and Malaga.
In North America, there has been a successful operational start up to the new school year, benefiting from 75 per cent. of driver recruitment now being centralised under the Business Transformation programme. This programme has also made good progress in the further roll out of the centralised systems which are core to future benefit delivery. Margin improvement remains the Group's key objective in this business over the medium term.
The Group continues actively to manage its overall debt position and its self help programme continues to focus on delivering cash management initiatives, aimed at maintaining compliance with the Group's key debt covenants. These initiatives include continued effective management of capital investment and working capital, suspension of dividend payments and additional asset sales. During the third quarter of 2009, the Group raised approximately £15 million in a sale and leaseback of its new flagship coach and office facility in Birmingham.
Net debt increased during the third quarter of 2009 to approximately £1.1 billion in line with the normal seasonal pattern, reflecting new fleet investment and increased receivables required for the new school year in North America. The Board expects net debt to decline in the fourth quarter of 2009, although this will be subject to timing of payments to be made in connection with the handover of the East Coast franchise and the impact of Sterling's weakness, which added approximately £30 million to net debt translation in the third quarter of 2009.
DIRECTORS' AND MAJOR SHAREHOLDER'S INTENTIONS
Each of the Directors who holds Ordinary Shares has undertaken to take up in full his or her rights to subscribe for New Ordinary Shares under the Rights Issue in respect of his or her beneficial holdings, which together amount to 53,639 Ordinary Shares, representing approximately 0.04 per cent. of the issued ordinary share capital of the Company as at the date of the Rights Issue Prospectus.
The Board is not aware of the intentions of European Express Enterprises Limited, the Company's largest shareholder, in relation to the Rights Issue. The Rights Issue falls outside the parameters which were communicated by the Cosmen family to the Company, within which the Cosmen family had agreed to support an equity fundraising.
SIGNIFICANCE OF THE RIGHTS ISSUE
The Board considers the Rights Issue to be the most appropriate way to build on the Group's progress to date in debt reduction and to achieve a significant reduction in the Group's net debt. The Board believes that the Rights Issue will allow the Group to continue to maintain appropriate levels of covenant headroom in the near term and to place the Group in a stronger position to negotiate future debt financing and refinancing requirements.
National Express is of the opinion that, taking into account available bank and other facilities and the net proceeds of the Rights Issue receivable by the Company, the Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the date of the Rights Issue Prospectus. However, were the Rights Issue not to proceed, it is likely that the Group would not be able to comply with its banking covenants when they are next tested as at 31 December 2009.
A possible breach of the Group's banking covenants was highlighted by the Board in the 2009 Interim Results, which are incorporated by reference into the Rights Issue Prospectus, and resulted in the Auditors noting an emphasis of matter in their independent review report to Shareholders.
The key effective covenant for the Group currently is the debt gearing ratio (the ratio of adjusted net debt to EBITDA). When the Group's banking covenants were last tested as at 30 June 2009, the limit on the Group's debt gearing ratio under the covenants set out in the Facilities was 4.0 times EBITDA although this ratio will reduce to 3.5 times EBITDA when these covenants are next tested as at 31 December 2009. The Group is currently in compliance with its banking covenants.
However, given the backdrop of lower Group earnings in the 2009 financial year versus the 2008 financial year, together with the costs that could arise from the handover of the East Coast franchise, it is likely that, should the Rights Issue not proceed the Group's debt gearing ratio will continue to be greater than 3.5 times EBITDA, and consequently the Company will be unable to comply with its financial covenants under the Facilities when they are next tested as at 31 December 2009.
The Board therefore considers it important to explain to Shareholders the consequences for the Group should the Rights Issue not proceed.
In the event that the Resolutions are not passed at the EGM or the Banks exercise their right to terminate the Underwriting Agreement prior to Admission, the Rights Issue will not proceed.
In these circumstances the Group would need to seek to agree with its current lenders an extension or deferral of these covenants, or a temporary waiver of any likely covenant breach. The Board considers it likely that the relevant lenders would only agree to this amendment to the Facilities or the waiver of any likely covenant breach on terms that are likely to be more onerous than the existing terms of the Facilities. Such terms may include, amongst other things, further restrictive covenants, dividend payment restrictions, extensive security over the Group's assets and higher financing costs. There can be no assurance that terms would be agreed either on a basis that would be commercially acceptable to the Group, or, if at all. In addition, in the absence of Shareholder support for equity funding, the relevant lenders may seek to negotiate, as part of any extended and/or replacement facilities an equity stake in the Group, whether by way of a debt for equity swap, warrants convertible into equity, or otherwise. Any such provisions could be significantly dilutive to Shareholders and potentially more dilutive than the proposed Rights Issue.
However, there can be no certainty that the lending banks under the Facilities would in these circumstances agree to a relaxation of the Group's banking covenants or waiver of any likely breach of those covenants.
Accordingly the Group may also have to seek to dispose of certain of its assets on a forced sale basis and potentially on commercially unattractive terms. However, there can be no certainty that any such steps would be effective in reducing the Group's debt gearing ratio to 3.5 times EBITDA by 31 December 2009.
Any breach of the Group's banking covenants will permit the Group's lending banks to call an event of default under the Facilities and, as a result of cross-default provisions, default may also arise in respect of certain other financial indebtedness of the Group. In these circumstances, the lending banks under the Facilities would be permitted to exercise certain rights, including the right to cancel the Facilities, accelerate the payment of sums owing under the Facilities, enforce any security and guarantees granted by the Company and certain other members of the Group, and initiate insolvency or similar proceedings against Group companies which have granted such security and/or guarantees in connection with the Facilities, including the Company. In such circumstances it is likely that the Group would be unable to continue trading.
RECOMMENDATION
The Board considers the Rights Issue and the Resolutions to be in the best interests of the Company and Shareholders as a whole. Accordingly, the Board recommends that you vote in favour of the Resolutions to be proposed at the Extraordinary General Meeting, as each of the Directors who holds Ordinary Shares has undertaken to do in respect of their own beneficial holdings, which together amount to 53,639 Ordinary Shares, representing approximately 0.04 per cent. of the issued ordinary share capital of the Company as at the date of the Rights Issue Prospectus.
EXPECTED TIMETABLE OF PRINCIPAL EVENTS FOR THE RIGHTS ISSUE
|
|
2009 |
|
Announcement of the Rights Issue and publication of the Rights Issue Prospectus |
11 November |
|
Publication and despatch of the Rights Issue Prospectus and Form of Proxy |
11 November |
|
Record Date for entitlements under the Rights Issue |
close of business on 24 November |
|
Latest time and date for receipt of Forms of Proxy |
11.00 a.m. on 25 November |
|
Extraordinary General Meeting |
11.00 a.m. on 27 November |
|
Despatch of Provisional Allotment Letters (to Qualifying Non-CREST Shareholders only) |
27 November |
|
Start of subscription period |
30 November |
|
Admission/Commencement of dealings in Nil Paid Rights on the London Stock Exchange |
8.00 a.m. on 30 November |
|
Stock accounts credited with Nil Paid Rights (for Qualifying CREST Shareholders) |
30 November |
|
Existing Ordinary Shares marked ''ex-rights'' by the London Stock Exchange |
8.00 a.m. on 30 November |
|
Nil Paid Rights and Fully Paid Rights enabled in CREST |
30 November |
|
Latest time and date for acceptance, payment in full and registration of renunciation of Provisional Allotment Letters |
11.00 a.m. on 14 December |
|
Announcement of results of Rights Issue through a Regulatory Information Service |
7.00 a.m on 15 December |
|
Commencement of dealing in New Ordinary Shares fully paid |
8.00 a.m. on 15 December |
|
New Ordinary Shares credited to CREST stock accounts |
15 December |
|
Despatch of definitive share certificates for the New Ordinary Shares in certificated form |
24 December |
Note: The times and dates set out in the expected timetable of principal events above may be adjusted by National Express in consultation with the Joint Sponsors in which event details of the new times and dates will be notified to the FSA, London Stock Exchange and, where appropriate, Qualifying Shareholders.
APPENDIX II
DEFINITIONS
In this announcement, the following expressions have the following meanings unless the context requires otherwise:
|
2008 financial year |
year ended 31 December 2008 |
|
2009 financial year |
year ending 31 December 2009 |
|
Admission |
the admission of the New Ordinary Shares (nil paid) (i) to the Official List and (ii) to trading on the London Stock exchange's main market for listed securities becoming effective in accordance, respectively, with the Listing Rules and the Admission and Disclosure Standards |
|
Admission and Disclosure Standards |
the requirements contained in the publication ''Admission and Disclosure Standards'' containing, inter alia, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchange's main market for listed securities |
|
ALSA |
Alsa Group S.L.U. |
|
Australia |
the Commonwealth of Australia, its territories and possessions |
|
Banks |
Merrill Lynch, Morgan Stanley & Co. International plc and Morgan Stanley Securities Limited |
|
Board |
the board of Directors of the Company |
|
c2c |
the Group's c2c UK rail franchise |
|
Canada |
Canada, its provinces and territories and all areas under its jurisdiction and political subdivisions thereof |
|
certified or certificated form |
not in uncertificated form |
|
Co-Bookrunners |
Barclays Bank PLC and RBS Hoare Govett Limited |
|
Co-Lead Managers |
Banco Bilbao Vizcaya Argentaria S.A., BNP PARIBAS, Commerzbank Aktiengesellschaft, HSBC Bank plc |
|
Company or National Express |
National Express Group PLC |
|
Continental Auto |
Continental Auto S.L.U |
|
CREST |
the relevant system (as defined in the Uncertified Securities Regulations) for paperless settlement of share transfers and the holding of shares in uncertificated form in respect of which Euroclear UK & Ireland is the operator (as defined in the Uncertified Securities Regulations) |
|
DfT |
the UK Department for Transport |
|
Directors or the Board |
the current directors of the Company |
|
DOR |
Directly Operated Railways Limited, a special purpose holding company established by the DfT |
|
EBITDA |
earnings before exceptional items, interest, tax, depreciation and amortisation |
|
EEEL |
European Express Enterprises Limited |
|
Employee-Share Schemes |
the employee share schemes described in paragraph 6 of Part VII of the Rights Issue Prospectus |
|
Enlarged Share Capital |
the issued share capital of the Company following the passing of the Resolutions |
|
Equiniti or Registrars |
the Company's registrars, Equiniti Limited, of Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA |
|
Euroclear UK & Ireland |
Euroclear UK & Ireland Limited, the operator of CREST |
|
European Economic Area or EEA |
the European Union, Iceland, Norway and Liechtenstein |
|
Existing Ordinary Shares |
the fully paid Ordinary Shares in issue at the Record Date |
|
Extraordinary General Meeting or EGM |
the extraordinary general meeting of the Company to be held in connection with the Rights Issue |
|
Facilities |
the Sterling RCF and the Euro Bridge Facility, and ''Facility'' means either of them |
|
Financial Services Authority or FSA |
the Financial Services Authority in its capacity as the competent authority for the purposes of Part VI of FSMA and in the exercise of its functions in respect of admission to the Official List otherwise than in accordance with Part VI of FSMA |
|
FirstGroup |
FirstGroup plc |
|
FSMA |
the Financial Services and Markets Act 2000, as amended from time to time |
|
Fully Paid Rights |
rights to subscribe for New Ordinary Shares, fully paid |
|
GDP |
gross domestic product |
|
Group |
the Company and its subsidiaries from time to time |
|
Issue Price |
105 pence per New Ordinary Share |
|
Japan |
Japan, its territories and possessions and any areas subject to its jurisdiction |
|
Joint Bookrunners |
Merrill Lynch and Morgan Stanley & Co. International plc |
|
Joint Global Co-ordinators |
Merrill Lynch and Morgan Stanley & Co. International plc |
|
Joint Sponsors |
Merrill Lynch and Morgan Stanley & Co. International plc |
|
Joint Lead Underwriters |
Merrill Lynch and Morgan Stanley Securities Limited |
|
Listing Rules |
the listing rules made by the FSA under Part VI of FSMA (as amended from time to time) |
|
London Stock Exchange |
London Stock Exchange Group plc |
|
Merrill Lynch |
Merrill Lynch International (a subsidiary of Bank of America) |
|
National Express East Anglia |
the Group's East Anglia UK rail franchise |
|
National Express East Coast |
the Group's East Coast UK rail franchise |
|
New Ordinary Shares |
New Ordinary Shares to be issued by the Company pursuant to the Rights Issue |
|
Nil Paid Rights |
New Ordinary Shares in nil paid form provisionally allotted to Qualifying Shareholders pursuant to the Rights Issue |
|
North America |
the United States of America and Canada |
|
Notice of EGM or Notice of Extraordinary General Meeting |
the notice of extraordinary general meeting set out at the end of the Rights Issue Prospectus |
|
NXEC |
NXEC Trains Limited, the special purpose vehicle which operates National Express East Coast |
|
Official List |
the Official List of the UK Listing Authority |
|
Ordinary Shares |
the ordinary shares of 10 pence each in the capital of the Company |
|
Overseas Shareholders |
Qualifying Shareholders who have registered addresses outside the UK |
|
Provisional Allotment Letter |
the renounceable provisional allotment letter to be issued to Qualifying non-CREST Shareholders by the Company in respect of the Nil Paid Rights pursuant to the Rights Issue |
|
Qualifying CREST Shareholders |
Qualifying Shareholders whose Ordinary Shares on the register of members of the Company at the close of business on the Record Date are in uncertificated form |
|
Qualifying non-CREST Shareholders |
Qualifying Shareholders whose Ordinary Shares on the register of members of the Company at the close of business on the Record Date are in certificated form |
|
Qualifying Shareholders |
holders of Ordinary Shares on the register of members of the Company at the close of business on the Record Date |
|
Record Date |
close of business on 24 November 2009 |
|
Regulatory Information Service |
a regulatory information service that is approved by the FSA and that is on the list of regulatory information service providers maintained by the FSA |
|
Resolutions |
the resolutions set out in the Notice of EGM |
|
Restricted Jurisdictions |
the United States, Canada, Japan, the Republic of South Africa and Australia and any other jurisdiction outside the UK in which it would be unlawful or in contravention of certain regulations to offer the Nil Paid Rights or New Ordinary Shares under the Rights Issue |
|
Rights |
the Nil Paid Rights and the Fully Paid Rights |
|
Rights Issue |
the proposed offer by way of rights of the New Ordinary Shares to Qualifying Shareholders at the Issue Price on the terms and subject to the conditions set out in the Rights Issue Prospectus and, in the case of Qualifying non-CREST Shareholders and Qualifying US Investors only, the Provisional Allotment Letter |
|
Rights Issue Prospectus |
the prospectus being published by the Company in connection with the Rights Issue |
|
RPI |
Retail Price Index |
|
Securities Act |
the United States Securities Act of 1933, as amended |
|
Shareholders |
holders of Ordinary Shares and ''Shareholder'' means any one of them |
|
Stagecoach |
Stagecoach Group plc |
|
Takeover Panel |
The Panel on Takeovers and Mergers |
|
TOC |
train operating company |
|
Uncertified Securities Regulations |
the Uncertificated Securities Regulations 2001 (SI 2001 No 3755), as amended from time to time |
|
Underwriters |
each of Merrill Lynch, Morgan Stanley Securities Limited, the Co-Bookrunners and the Co-Lead Managers |
|
Underwriting Agreement |
the agreement between the Company and the Banks dated 11 November 2009, the principal terms of which are summarised in section 10 of Part VII of the Rights Issue Prospectus |
|
United Kingdom or UK |
the United Kingdom of Great Britain and Northern Ireland |
|
United States or US |
the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia |
|
VAT |
value added tax |
|
£, pence, p or Sterling |
the lawful currency of the UK |
|
€ or Euro |
the lawful currency of the member states of the European Union that adopt a single currency in accordance with the Treaty establishing the European Community as amended |
APPENDIX III
This announcement is for information purposes only and shall not constitute an offer to buy, sell, issue or subscribe for, or the solicitation of an offer to buy, sell, issue, or subscribe for any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Persons into whose possession this announcement or any such document comes should inform themselves about and observe any relevant legal restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
The information contained herein is not for forwarding, publication or distribution, directly or indirectly, in or into the United States (including its territories and possessions, any state of the United States and the District of Columbia). These materials do not contain or constitute an offer for sale or the solicitation of an offer to purchase securities in the United States. The securities referred to herein (the "Securities") have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") or with any securities regulatory authority of any state or jurisdiction of the United States, and may not be offered or sold in the United States absent registration under the Securities Act or an available exemption from, or transaction not subject to, the registration requirements of the Securities Act. There will be no public offer of the Securities in the United States.
Each of Merrill Lynch International, Morgan Stanley & Co. International plc, Morgan Stanley Securities Limited, Barclays Bank PLC, RBS Hoare Govett Limited, Banco Bilbao Vizcaya Argentaria S.A., BNP PARIBAS, Commerzbank Aktiengesellschaft, and HSBC Bank plc (the "Banks") is acting exclusively for the Company and no-one else in relation to the Rights Issue and is not, and will not be, responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Rights Issue or any other matter referred to herein. Apart from the responsibilities and liabilities, if any, which may be imposed on the Banks by the FSMA, each of the Banks accepts no responsibility whatsoever and makes no representation or warranty, express or implied, for the contents of this announcement, including its accuracy, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company, the New Ordinary Shares, the Nil Paid Rights, the Fully Paid Rights or the Rights Issue, and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or future. Each of the Banks accordingly disclaim to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise (save as referred to above) which they might otherwise have in respect of this announcement or any such statement.
Each of the Banks may, in accordance with applicable legal and regulatory provisions and the terms of the Underwriting Agreement, engage in transactions in relation to the Nil Paid Rights, the Fully Paid Rights or Ordinary Shares and/or related instruments for its own account for the purpose of hedging its underwriting exposure or otherwise in connection with the Rights Issue. Except as required by applicable law or regulation, the Banks do not propose to make any public disclosure in relation to such transactions.
No person has been authorised to give any information or to make any representations other than those contained in this announcement and, if given or made, such information or representations must not be relied on as having been authorised by the Company or any of the Banks. Subject to the Listing Rules, the Prospectus Rules and the Disclosure Rules and Transparency Rules, the issue of this announcement shall not, in any circumstances, create any implication that there has been no change in the affairs of the Group since the date of this announcement or that the information in it is correct as at any subsequent date.
This announcement does not constitute a prospectus or prospectus equivalent document. The Rights Issue Prospectus relating to the Rights Issue will be prepared and made available in accordance with EU Directive 2003/71/EC and/or Part VI of the FSMA. Any decision to invest in the Company must be made only on the basis of the information contained in and incorporated by reference into the Rights Issue Prospectus. The Rights Issue Prospectus, when published, will be available on the Company's website and in hard copy from the Company's registered office.
No statement in this announcement is intended as a profit forecast or a profit estimate and no statement in this announcement should be interpreted to mean that earnings per share for the current or future financial years would necessarily match or exceed the historical published earnings per share.
Prices and values of, and income from, securities may go down as well as up and an investor may not get back the amount invested. It should be noted that past performance is no guide to future performance. Persons needing advice should consult an independent financial adviser.
Neither the content of the Company's website (or any other website) nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
This announcement has been prepared for the purposes of complying with applicable law and regulation in the United Kingdom and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of the United Kingdom.
Cautionary note regarding forward-looking statements
This announcement includes statements that are, or may be deemed to be, "forward-looking statements". The words ''believe'', ''anticipate'', ''expect'', 'intend'', ''aim'', ''plan'', ''predict'', ''continue'', ''assume'', ''positioned'', ''may'', ''will'', ''should'', ''shall'', ''risk'' and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the Directors, the Company or the Group concerning, amongst other things, results of operations, financial condition, liquidity, current trading and prospects, growth, strategy and dividend policy of the Group. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Group's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's results of operations, financial condition, liquidity, current trading and prospects, growth, strategy and dividend policy and the development of the industries and markets in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement and/or the information incorporated by reference into this announcement. In addition, even if the results of operations, financial condition, liquidity, current trading and prospects, growth, strategy and dividend policy of the Group are consistent with the forward-looking statements contained in this announcement and/or the information incorporated by reference into this announcement, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences are set out in the section of the Rights Issue Prospectus entitled "Risk Factors".
You are advised to read this announcement and, once available, the Rights Issue Prospectus and the information incorporated by reference therein, in their entirety for a further discussion of the factors that could affect the Group's future performance and the industries in which it operates. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.
Other than in accordance with their legal or regulatory obligations (including under the Listing Rules, the Prospectus Rules and the Disclosure Rules and Transparency Rules), neither the Company nor any of the Banks undertakes any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
This information is provided by RNS
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