Agreement to acquire RATP London

FirstGroup plc (the `Group') is pleased to announce that it has signed an agreement to acquire RATP Dev Transit London Limited and its subsidiaries (`RATP London') from RATP Développement SA (`RATP Dev') for an enterprise value of £90 million (the `Acquisition').

The Acquisition will see the Group enter the London bus market with a strong position and will further grow and diversify the Group's revenue. RATP London is one of the principal bus operators in the capital, with a c.12% market share, comprising:

10 depots across Central and West London (four owned and six leased);

a fleet of c.1,000 buses of which a third are fully electric;

c.3,700 employees over 80% of whom are drivers;

c.90 Transport for London (`TfL') route contracts, typically of seven-year term; (weighted average remaining contract life of 3.3 years)

revenues of £271m for the year ended 31 December 2023; and

an experienced management team with a proven track record of developing and implementing a comprehensive turnaround plan that includes enhanced bid discipline and improved operational and cost performance

The enterprise value is underpinned by c.£100m of physical assets including freehold property of c.£50m.

The Acquisition will be financed with £45 million from the Group's existing cash reserves and the assumption of RATP London's asset backed vehicle finances leases (c.£45m).

Following completion of the Acquisition, the Group anticipates:

the Acquisition will be broadly earnings neutral in FY 2025 and FY 2026; onerous contract provisions totalling c.£40-50m will be utilised over several years;

as the route contract portfolio evolves over the next five years, annual revenues are expected to grow to £300-350m, with operating margins in line with historical London levels of c.6-7%;

looking ahead, in addition to the measures included in the current turnaround plan, the Group has identified a number of potential synergies that could further enhance profitability;

operating cash outflows of c. £30m, after bus operating lease payments and capex, in the first two years of ownership, following which the business is expected to be operating cash positive from FY 2027 onwards;

RATP London's current management team will transfer with the business and are expected to be retained post-acquisition.

The Acquisition is subject to French government approval (in its capacity as the ultimate owner of the business) and is conditional on TfL consent to the change of control. The Group anticipates completion of the Acquisition in H1 Calendar Year 2025.

Graham Sutherland, FirstGroup Chief Executive Officer said:

"This is a significant acquisition for the Group that will diversify our portfolio and materially grow our earnings in the medium term. It allows us to enter the London bus market at scale and will also bolster our credentials as we participate in future franchising opportunities across the UK.

"We look forward to continuing to build on our relationship with TfL and welcoming RATP London's employees into the Group, to continue the transformation of the business and to capitalise on the growth potential in the London market."

Investor & Analyst webcast

A webcast for investors and analysts will be held at 09:00 (GMT) today. To request the webcast details, please email corporate.comms@firstgroup.co.uk. To access the presentation slides, together with a pdf copy of this announcement, go to www.firstgroupplc.com/investors. A recording of the webcast will also be available on the website in due course.

Impact on the Group's FY 2025 and FY 2026 financial outlook

Should the Acquisition complete in the fourth quarter of the Group's financial year ending March 2025, it is anticipated that its FY 2025 net capital expenditure will be c.£125m and year-end adjusted net debt will be c.£110m. The Group will also recognise additional IFRS16 lease liabilities of c.£60m in FY 2025.

In FY 2026, RATP London is anticipated to make a small contribution to the First Bus adjusted operating profit, at a lower margin, and the Group's net capital expenditure is expected to increase to c.£125m, with the majority of expenditure in First Bus electrification. There will be an increase in the Group's interest cost of c.£6m, including IFRS 16, relating to the Acquisition, and the Group's FY 2026 year-end Adjusted net debt is expected to be c.£130m.

Share Purchase Agreement terms

Under the terms of the Share Purchase Agreement (`SPA'), FirstGroup plc will acquire, through its wholly-owned subsidiary, First Bus Holdings Limited (`First Bus'), the entire issued share capital of RATP Dev Transit London Ltd and its three operating subsidiaries, London Transit Limited, London Sovereign Limited and London United Busways Limited, from RATP Dev UK Ltd (the `Seller'), a wholly-owned subsidiary of RATP Dev. The consideration will be paid in full on completion, subject to a normal post-completion true-up process. The entire debt of RATP London will be assumed or repaid by the Seller's group prior to completion, apart from the debt relating to hire purchase and lease finance obligations (projected to be c.£45m as at 31 December 2024) which are expected to remain with RATP London at completion.

The Group has provided a parent company guarantee to underpin the obligations of First Bus under the SPA, and similarly the Seller's parent, RATP Dev, guarantees the obligations of the Seller. The SPA includes a customary suite of warranties and indemnities, subject to caps and limitations as appropriate.

The Seller is required to carry on operating and funding the business in line with past practice in the period to completion. A limited suite of transitional services will continue to be provided by the Seller and its group for a short period post-completion under the terms of a Transitional Services Agreement (`TSA'). Satisfaction of the conditions is subject to a longstop date of 30 April 2025. The current management team will transfer with the business and are expected to be retained post-acquisition.

London bus market1

London is a £2.1bn bus market, accounting for around 46% of the entire UK bus market. There are c.9,000 buses in London, with the market primarily served by six major operators.

Bus patronage is expected to continue to recover back to pre-Covid levels, supported by modest population growth across London, further growth in tourist volumes, continued declines in car utilisation and investment in the expansion of the bus network. TfL's Business Plan expects bus patronage to grow at c.4% per annum between 2025 and 2027, recovering fully to pre-Covid levels by 2027.

Looking at modal share, despite a slight shift towards the London Underground and more recently, suburban rail networks, bus remains the primary mode of transport within London, with an average of 192 journeys per capita in 2023 (accounting for >50% of all journeys made).

The size of the London bus network has also been resilient, with a broadly stable number of network miles operated between 2012 and 2020, and only a very modest decline between 2020 and 2024. This reflects the consistent levels of funding allocated to support operators, with long-term funding growth of c.3% per annum between 2004 and 2023 demonstrating TfL's commitment to bus. In 2023 Bus accounted for approximately 25% of total TfL operating expenditure (equivalent to £2.1bn per annum).

Overview of TfL contracts

London bus operations are entirely regulated by TfL, with each individual route forming a contract which is bid for by authorised private sector operators. TfL decide the contract specifications for a given bus route, control ticket prices and collects passenger revenue. Operators own the buses and depots, and source and pay drivers to run routes. The proximity of the line of route to the operator's depot and staff changeover facilities is therefore key to maximising efficiency and being competitive on bid price.

Individual route contracts are tendered competitively by TfL, generally over seven-year terms, resulting in a franchising model where there is minimal risk of losing large parts of the business at one time, and with a view to full decarbonisation of the fleet.

The route contracts bear no revenue risk on the base price bid. Inflation is allowed for based on 85% of revenue against which CPI is applied, and TfL assuming 15% of bus operator cost base does not inflate.

TfL is entitled to make deductions for lost mileage (at a specified rate per mile) where caused by reasons within the operator's reasonable control (such as missing drivers or mechanical breakdown), and fares payment irregularities (i.e. underpayment by passengers). Operators are not penalised for lost mileage that is not within their control, for example traffic or roadworks delays.

In addition, operator performance is measured and incentivised / penalised through quality of service indicators within the contracts, known as Quality of Service Indicators (`QSIs'). Under the QSI regime, bonus payments and liquidated damages are based on the operator's performance against a defined minimum performance standard of Excess Wait Times (`EWT') or a minimum percentage of "On-Time" services. Bonuses are earned up to an annual maximum 15% of contract payments (less any deductions for lost mileage) (the `Contract Sum') for good performance, with liquidated damages for poor performance capped annually at 10% of the Contract Sum.

1 Source: TfL data

Notes