FirstGroup’s rejection of a hostile takeover approach from US private equity group Apollo Management has sparked discussion on pensions.
FirstGroup – one of the biggest train operators in the UK and British owner of America’s Greyhound bus service – announced on Wednesday that the company had rejected an all-cash offer from Apollo.
Equitability of treatment is key. Shareholders getting a premium often involves a pension scheme being exposed to greater risk, particularly if it turns out to be a leveraged bid weakening the pension scheme covenant
Darren Redmayne, Lincoln Pensions
The statement revealed that FirstGroup had “considered the proposal in detail and believes that it fundamentally undervalues the company and is opportunistic in nature”.
It described the offer as “preliminary and highly conditional”.
The news comes weeks after Melrose Industries agreed with GKN’s pension trustees to pump £1bn cash into GKN’s schemes as part of its attempted takeover of GKN.
Darren Redmayne, CEO of covenant specialists Lincoln Pensions, said: “As with Melrose and GKN this is another example of an iconic British company subject to a takeover bid where pensions are at the absolute heart of whether the deal happens or not.”
He added it is vitally important that shareholders are not the only beneficiaries in these situations.
“Equitability of treatment is key. Shareholders getting a premium often involves a pension scheme being exposed to greater risk, particularly if it turns out to be a leveraged bid weakening the pension scheme covenant,” Redmayne said.
The government’s white paper on defined benefit pensions, published earlier this month, set out a number of ways in which it aims to boost the powers of the Pensions Regulator, particularly when it comes to scrutinising corporate transactions.
Redmayne said: “Directors’ responsibilities have been thrust into the spotlight and they will be aware that their actions will be subject to increased scrutiny. To this end, when deciding whether or not to recommend a takeover proposal they should consider, and crucially show that they have considered, their obligations to the pension schemes alongside shareholders.”
In a bid to reduce the size and the volatility of the pension funding risk over the longer term, FirstGroup has given notice to its UK DB scheme to close to future accrual from April 2018, according to the company’s latest annual report.
The net pension deficit for its UK and North American schemes increased from £270.9m at the beginning of the year to £358.5m at March 31 2017.
