FirstGroup Plunges After West Coast Deal Is Canned

LONDON -- Just yesterday, all seemed sweet for FirstGroup  (LSE: FGP.L  ) , as it updated investors on its business and said it was on course to take over the running of the West Coast rail franchise from Virgin Trains in a couple of months' time.

In early trading this morning, its shares plunged 15% to 206 pence after the Department for Transport, or DfT, said it was canceling its previous decision due to "significant technical flaws in the way their franchise process for the InterCity West Coast was conducted."

Commenting on the news, FirstGroup said:

We understand the DfT has ordered two urgent independent inquiries into the West Coast competition and the wider DfT rail franchise program. Until this point we had absolutely no indication that there were any issues with the franchise letting process and had received assurances from the DfT that their processes were robust and that they expected to sign the contract with FirstGroup soon. The DfT have made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT's terms.

Stagecoach  (LSE: SGC.L  ) , which owns 49% of Virgin Trains, said it was monitoring developments. Its shares rose by 1% to 286 pence. Richard Branson, as you would expect, said he welcomed the decision.

The government added that the flaws uncovered relate to the way the procurement was conducted by DfT officials, and that an announcement would be made later today concerning the suspension of staff while investigations take place. More specifically, it said that mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.

In the meantime, all other outstanding rail franchise competitions (Great Western, Essex Thameside, and Thameslink) have been postponed, pending the independent reviews.

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Stuart Watson does not own any of the shares listed above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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