FirstGroup's Pricey West Coast Rail Victory

LONDON -- After plenty of press reports, it wasn't a huge surprise to see FirstGroup (LSE: FGP.L  ) win the West Coast rail franchise this morning. The new deal will begin Dec. 9 and run for 13 years and four months, with an option to extend for a further 20 months.

FirstGroup says the net present value of premiums paid to the government will be 5.5 billion pounds, well ahead of the 4.8 billion pounds offered by the current operator, Virgin Trains, a joint venture between Richard Branson and Stagecoach (LSE: SGC.L  ) . Other bidders included France's SNCF and Nederlandse Spoorwegen, the Dutch national railway company.

It's fair to say Branson isn't overly impressed with the whole affair. In his blog, he said: "We also did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise, as happened to GNER and National Express who overbid on the East Coast mainline. Sadly, the Government has chosen to take that risk with FirstGroup..."

He continued: "Based on the current flawed system, it is extremely unlikely that we would bid again for a franchise. The process is too costly and uncertain, with our latest bid costing 14 million pounds. We have made realistic offers for the East Coast twice before, which were rejected by the Department for Transport for completely unrealistic ones, and therefore will have to think hard before embarking on another bid."

Saucer of milk for Mr. Branson, please. Stagecoach's Brian Souter seemed equally miffed, but concluded by saying: "Stagecoach will now continue to assess other franchise opportunities and, where appropriate, will work in conjunction with its Virgin partner." A number of other rail franchises are due to be awarded over the next 12 months, so this is a key period for the big transport groups. Stagecoach has already been shortlisted to bid for Greater Western and Thameslink.

FirstGroup's revenue assumptions do seem rather heroic, as they are expecting a 10.4% compound annual growth rate in revenue, compared to 8.5% projected by Virgin Trains. The franchise is already generating annual revenues of around 900 million pounds.

Some of the key improvements promised are 11 new six-car trains for the Birmingham to Scotland route, a reduced 15-minute journey time between Glasgow and London, new direct services from London to Blackpool, Telford, Shrewsbury and Bolton, plus a 15% reduction in Standard Anytime fares.

FirstGroup shares actually fell by some 4% to 248 pence this morning, although they had already increased by some 20% in the last month in anticipation of this announcement. Stagecoach shares slipped just 1 pence to 285.5 pence.

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