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Bus journeys are not known for their speed. That may explain the plodding pace Mobico, formerly National Express, is taking towards the sale of its North American school bus business. First mooted in October last year, the company said on Wednesday the wheels were finally officially rolling. Hopes for lower debts and a return to payouts lifted Mobico shares by almost a fifth in response.
US school bus operators took a battering during the pandemic as routes shut down and inflation pushed costs higher. Mobico’s delayed timetable for the sale probably reflects an improvement in those prospects this year. The US school bus business has made its first net gain in routes for more than decade. It has also been able to push through above inflation price rises. Also flagged at interim results was better driver retention — a big source of cost inflation.
The proceeds of a sale are sorely needed to get Mobico’s debts down. Net debt including a non-covenant constrained hybrid perpetual bond sits at about £1.6bn — or more than four times ebitda. Mobico reports gearing on a covenant level only, which was almost three times in the first half. It hopes to get this down to at least two times by 2027.
That should be more than doable. US school bus businesses have been in vogue with private investors in recent years. The fragmented market of private outsourcers appears ripe for a consolidation and cost-cutting strategy. EQT acquired the market’s largest participant, First Student, from FirstGroup in 2021 for an enterprise value of £3.3bn.
Mobico’s business is the number two with a tenth share of the market — or about a half that of First Student. Number three participant Student Transportation of America was acquired by Québec’s investment fund in 2019. The average take-out multiple for deals back to 1999 was eight times EV/Ebitda, notes Jefferies. First Student fetched a higher nine times multiple.
Hopes are that Mobico’s scale, plus the higher margins it achieved before the pandemic compared with its two main competitors, will equate to a premium. But taking the average EV/ebitda multiple for bus deals, the business is worth about £1bn using 2025 estimates. That would be enough to get Mobico’s reported gearing down to zero, assuming it all goes towards deleveraging. Including the hybrid bond, gearing would be two times net debt.
Assumptions that would leave Mobico’s remaining European bus and rail transport business trading on just a two times multiple of 2025 ebitda, about a one-quarter discount to FirstGroup. Would-be passengers should consider climbing on board.
andrew.whiffin@ft.com
