By Scott Wright

SHARES in Stagecoach leapt nearly 30 per cent last night after the Scottish-headquartered company opened the door to a potential merger with fellow transport giant National Express.

The City showed its enthusiasm for the proposed deal by sending the share prices of both companies soaring, amid forecasts that annual savings of at least £35 million could be realised from the combination.

Talks between Perth-based Stagecoach and National Express on the all-share deal have taken place as transport companies bid to bounce back from the huge falls in passenger numbers brought by the pandemic.

Bus and rail operators have relied on hundreds of millions of pounds of government grants to ensure services could be maintained for essential workers during periods of lockdown.

With many people still working from home as the pandemic persists, it is not clear when or if volumes will fully recover.

Reporting its preliminary results for the year ended May 1 in June, Stagecoach said its regional bus operation was on an “improving path”, with commercial sales standing at around 68 per cent of the equivalent period in 2019. The figure had dropped to as low as 12% earlier in the pandemic.

Stagecoach was founded by siblings Sir Brian Souter and Dame Ann Gloag in 1980, when it began running coach services between Scotland and London.

The company floated on the London Stock Exchange in 1993, and in the 1990s became a major player in the UK’s privatised rail sector. It effectively signalled its exit from the rail system in 2019 when it said it would no longer bid for UK franchises, following a row with the Department for Transport over the “risk profile” involved.

The proposed merger would see shareholders in the Scottish company receive 0.36 new National Express ordinary shares for each ordinary share in Stagecoach. That would result in Stagecoach investors owning approximately 25% of the combined group.

The proposed deal would also imply a premium of 18% relative to the Stagecoach share price at the close of business on Monday (September 20) – the last business day before the announcement.

The companies also unveiled details of a proposed board structure of the combined company, which would reflect a “proportionate share of National Express and Stagecoach directors”.

Ray O’Toole, the current chairman of Stagecoach and a former chief operating officer of National Express, would chair the enlarged group, “leveraging his prior experience across both businesses”.

However, it is not clear if there will be a role for Martin Griffiths, the current chief executive of Stagecoach who has held the post since 2013. It is proposed that National Express chief executive Ignacio Garat and chief financial officer Chris Davies would retain those positions in the company.

Current National Express chairman Sir John Armitt would stand down.

In terms of synergies, the companies identified that around one-third of the savings would come from network efficiencies and optimisation, which would include National Express being able to utilise Stagecoach’s “well-located” depot network.

One-third would come from sharing operational best practice across the combined UK bus network, such as the roll-out of on-board technology systems, and combined and enhanced scheduling, network and route planning.

The final third would come from additional cost savings such as the rationalisation of duplicate plc costs, back office and IT processes, and the potential for non-depot property and office footprint rationalisation.

It is expected that realising the identified synergies would require one-off costs of up to around £40m over two years following completion of the deal.

Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said: “Given that the pandemic blew out the tyres of their business models and it’s been such a slow road back to health ever since, it comes as little surprise that rivals National Express and Stagecoach are now considering getting together to try and shoulder the recovery together.

“Consolidation in the hard-hit travel sector has been expected and it appears the bus coach and rail business is ripe for restructure.”

Ms Streeter added: “Now that social distancing rules have been eased, there are fewer bumps in the road to stop the acceleration back to full speed, but risks remain.

“The working from home revolution is still likely to be a drag on revenues going forward, with commuters likely to travel less in the future.

“Although some pent-up demand for travel will have been unleashed, it’s still far from clear when passenger numbers will return to pre-pandemic levels.”

Stagecoach currently employs around 24,000 people across the UK. National Express operates in eight countries and has a headcount of around 48,000 around the world.

Shares in Stagecoach closed up 27% at 86.4p.

National Express shares added 17% to close at 240.04p.