National Express journey has cost Cosmens dear

Bumpy ride with British transport group

The decision to take a stake in National Express Group has proved a costly experience for the Cosmen family. When they sold their Alsa coaching business to National Express Group in December 2005, the Cosmens received a 10% holding in NEG worth £140m as part payment. Since then they have spent £115m building their stake up to 19.7%.

As New Transit went to press, the Cosmens’ stake in the company was worth £105m - a loss of £150m on sharedealing and the shares acquired in return for the Alsa purchase. It is a far cry from the heights of November 2007, when NEG’s shares were touching £13. At that stage the Cosmens’ stake was worth around £300m representing a paper profit of £80m.

The call on the Cosmen’s chequebook has not ended yet. To keep their shareholding at its current level they will have to spend a further £70m on new shares in NEG’s planned £360m rights issue. The rights issue is needed to assist in paying down the group’s £1.1bn debt mountain and to ensure that the group does not breach banking covenants when they are tested in December.

At present, it is unclear whether the Cosmens will participate in the rights issue. Jorge Cosmen, NEG’s deputy chairman, was the sole member of NEG’s board to vote against the plan. He suggested that the rights issue should be held in conjunction with the refinancing of the group’s loans to give NEG a stronger position in dealings with the banks. He also argued that holding the rights issue in isolation could result in it raising too little or too much money for NEG’s requirements. He pointed out that there have been numerous examples of banks agreeing not to enforce covenants for companies in NEG’s situation and so it could be possible to delay the rights issue.

Uncertainty also remains over whether the Department for Transport will attempt to strip NEG of its c2c and East Anglia rail franchises as a result of it defaulting on its East Coast contract, a move which would cost NEG £26m in surrendered perfomance bonds. Even if cross-default is avoided there is considerable doubt at present over the group’s future rail earnings which could impact the refinancing to a degree. The three-year extension to the East Anglia franchise, which would have been awarded automatically in 2011 as a result of meeting operational targets, is no longer guaranteed. Default on the East Coast franchise means that the extension can now be awarded solely at the DfT’s discretion. Cosmen also argues that a rights issue was premature because NEG should explore the merits of strategic sales of some of its businesses or of the while group.

Nonetheless, despite their lack of support for the rights issue, it would be a surprise if the Cosmens did not participate in the fundraising to a greater or lesser degree. Failure to do so would see their shareholding in the company diluted to 6%, and towards the end of November, the Cosmens spent a further £6m on shares. A spokesman for the family explained that this was designed to show the market that the Cosmens remain “a committed and long term investor and to send a signal out that [the family’s] finance would not be a problem” if they choose to participate in the rights issue. There had been speculation in the City that the Cosmens’ use of NEG shares to guarantee a multi-million pound loan indicated they had run out of cash. This was denied by the family, which claimed that they had made the move for tax reasons and pointed out that they had operations in 25 countries.

The Cosmens also denied that they would lose their right to a seat on the NEG board if they do not participate in the rights issue. Whatever their decision though, the effect of NEG’s travails has been to leave them out of pocket to the tune of over £150m and counting. It is small wonder they were supporting the bids for NEG by CVC and Stagecoach, which could have prevented the need for a rights issue and valued their shareholding nearly 50% higher than its current level.

Date	Price Paid (£m)	Purchase Price (£ per share)	Shareholding (%)	Value of Cosmen holding (£m)
Nov 09	6.0	3.41-3.59	19.7	105.0
Dec 08	7	4.75-5.03	18.66	143.5
May 08	35.7	8.80	17.7	238.3
June 06	4	7.79	15.1	183.9
May 06	26	7.99-9.00	14.8	179.9
Jan 06	4.2	8.67-9.10	12.3	160.8
Dec 05	11	8.67-9.10	12.3	160.8
Dec 05	n/a*	9.22	11.3	157.3
Nov 05	16.2	9.20	1.3	16.2

* 10% of NEG shares received as part payment for Alsa