Ashurst sitting pretty as National Express rail saga rumbles on

Steven Fox

Given that the East Coast mainline has been described by one insider as “ill-fated”, the chosen date for the Government to reclaim the franchise could have been better considered. But at midnight on Friday 13 November the line reverted to public ownership – albeit temporarily.

The handover completes a ­torrid few months for former ­operator National Express – and a busy one for any law firms that have dipped their toes into the waters of the UK rail industry.

The loss of the franchise for National Express follows hard on the heals of a thwarted takeover bid in the summer and the ­departure of chief executive Richard Bowker in July.

Throw into the mix a £360m cash call that is being opposed by the company’s major shareholder, the Cosmen family, and the future appears less than rosy for the ­troubled transport company.

Ashurst has acted for National Express throughout its annus ­horribilis with corporate partner Steven Fox leading on the rights issue and transport partner Lee McDonald leading on the ­handover.

There could be plenty more legal work to come if the Department for Transport (DfT) attempts to take back the two franchises still under National Express control.

Transport Secretary Lord ­Adonis last week said he believed National Express should lose its right to run the profitable East Anglia and c2c lines under cross default rules. It is a move that would be opposed by the ­company and could yield yet more work for Ashurst as well as for the DfT’s longstanding adviser Eversheds. Transport partner Mark Brunton led the Eversheds team acting for the DfT on the East Coast handover.

Meanwhile, the cash call comes after a summer of on-off negotiations over a potential takeover ended with no bids left on the table and a boardroom at odds with its major shareholder.

The Cosmen family, advised by Greenberg Traurig Maher shareholder Paul Maher, owns nearly a fifth of National Express. It had backed a CVC Capital Partners-led ­consortium that put an offer in for the group in the summer, has come out against the offer. And although sources say the fully underwritten rights issue will still go ahead when it goes to an EGM later this week, the ­company appears far from out of the woods.

A bank syndicate headed by Merrill Lynch and Morgan Stanley is brokering the deal. A Freshfields Bruckhaus Deringer team led by corporate partner Julian Makin is acting for the syndicate.

The company was initially put in play shortly after it became clear that the DfT was not ­prepared to bail out the ­struggling East Coast franchise. Under advice from Slaughter and May corporate ­partner Nigel Boardman, FirstGroup made a preliminary approach in June about a possible merger, but after its advances were rejected it withdrew its interest a month later.

By then National Express had lost both its ‘jewel in the crown’ line and its CEO. Although the company denies any connection, insiders say Bowker had to ‘fall on his sword’ once the North East line was gone.

Rival operator Stagecoach, ­supported by the Cosmens and with a back-to-back deal in place to take over the bus and rail ­businesses, soon emerged as the most likely takeover candidate.
Clifford Chance acted for CVC on the deal, with private equity partners James Baird and Kem Ihenacho taking the lead, while corporate partner Ben Ward led a Herbert Smith team acting for Stagecoach.

A 500p-per-share indicative bid looked as if it might do the trick, but following two extensions of a ‘put up or shut up’ deadline from the Takeover Panel, the offer was withdrawn last month.

Despite this the Cosmens are still understood to favour a sale rather than the band-aid of a cash call, even if it means – in the short term at least – an expensive refinancing of around £1bn in debt.

“They [the family] are ­concerned about the way forward, a perceived lack of strategy and the mistakes that have been made,” says one lawyer familiar with the company. “It’s quite a fascinating situation. It’s almost unique for a major company of this type to have a major shareholder that’s so ­hostile.

“They’ve had a really tough summer. I wouldn’t have wanted to be a non-executive director. The rights issue might provide some stability financially, but there’s business instability.”

The group’s troubles are not all of its own making, with market conditions playing a part. Under advice from Denton Wilde Sapte partner Christopher McGee-Osborne it secured the East Coast franchise in 2007 at the very top of the market and for a price that was simply unsustainable after the economy began to nosedive in a way few could have foreseen.

The Government decision to effectively renationalise the line until it is put out to tender either next year or in 2011 has been painted as a severe case of ­shortsightedness by some lawyers familiar with the ­history of the franchise.

One says: “The bottom line is that, if the Government’s game is maximising revenue for its ­shareholders, the ­taxpayer, then what it’s done is lunacy.

“It’s making less money out of the new entity [state-run company ­Directly Operated Railways] than it would have out of National Express.”

The DfT decision came after National Express said it could no longer afford to repay instalments on the £1.4bn premium it had agreed to pay to run the London to Scotland ­service in 2007 after ­original operator GNER’s US ­parent company Sea Containers hit financial trouble.

The clean solution, especially for the Cosmens, would still be either a sale or a merger. But after the CVC consortium backed out of the deal the board balked at reentering negotiations with rival ­Stagecoach.

“National Express decided it was better to sort itself out,” says a source close to the deal. ­”Stagecoach would have been happy to get the assets from the [CVC] consortium.

“They went back to consider a full offer, but were disappointed. They felt it was a good deal for them and for National Express.”

Whatever the reasons for National Express deciding to raise capital instead of selling its assets, the group’s troubles are far from over – and that means a raft of legal mandates are still
to come.