Stagecoach Says Grayling Hasn't Let It Off Hook With Rail Reboot

(Bloomberg) -- U.K. train operator Stagecoach Group Plc said it welcomes the government's early termination of its unprofitable East Coast franchise but that the move is part of a wider realignment of rail policy and not designed to let it avoid future charges.

Transport Secretary Chris Grayling last week revealed that the franchise, due to run until 2023, will be terminated in 2020 and replaced with a partnership of track and train operators. Stagecoach Chief Executive Officer Martin Griffiths said the company will still book costs and impairment charges of almost 130 million pounds ($174 million) against the route.

“We support the direction of travel set out by Chris Grayling,” Griffiths said in an interview Wednesday, adding that it's in discussions with the government about recasting the truncated contract, with an agreement likely in the next few months. The terms should deliver value for taxpayers, while ensuring revenue risk remaining with Stagecoach is “acceptable,” he said.

Britain's opposition Labour Party says Grayling has let Stagecoach and partner Virgin Trains off the hook for the bulk of future East Coast costs as part of his wider overhaul of the U.K. railway. The companies originally agreed to pay 3.3 billion pounds to run the route, weighted toward the last years of the contract, as is standard, so that early termination could save them 2 billion pounds.

“There is no change to either the estimate of the onerous contract provision reported in June or the extent of the maximum financial commitments of the parent company in respect of the current franchise contract,” Stagecoach said.

Following the announcement of the charges in June, some 105 million pounds out of a loan commitment of 165 million pounds had been drawn down as of Oct. 28, almost double the amount in April, it said, adding that the total amount will be funded in full.

Griffiths said he didn't rule out re-bidding for the new East Coast franchise from 2020, assuming the commercial terms are attractive. Stagecoach already has experience of working in tandem with state-backed track operator Network Rail Ltd. on its former South West Trains franchise, though that deal was terminated and the East Coast crunch has also involved infrastructure issues.

Shares of Stagecoach rose 6 percent before closing 0.9 percent higher in London after the company posted better-than-expected earnings for the fiscal first half ended Oct. 28 and reiterated the full-year outlook.

The stock gained 13 percent on Nov. 29, when Grayling announced the East Coast changes, having dropped 6.2 percent June 28 when the company disclosed the one-time charges.

To contact the reporter on this story: Christopher Jasper in London at cjasper@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Andrew Noël

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