Mobico - A change in game theory.
All,
Notes from our call with Mobico this morning:
All eyes are on Germany negotiations, UK asset sales, ALSA margins and US contracts - so basically everything. The answers this morning have bearings on our game theory.
Addressing the Perps:
- Our Plan A needs rethinking.
- Fitch would recognise the entire Perp as debt as soon as Mobico intend to pay down any part of the facility. Since that would trip covenants, it’s not an option before dealing with the RCF. More on the RCF below. Also, the company has significant x-holders between private placements and uncommitted lines. If Mobico upset the sr. creditors by leaking out cash to the Perps, they fear that these institutions would pull their lines.
- So far, we have assumed that a part cash-part haircut deal to re-issue a new perp would be feasible (and we still think this would be the best way), but management are not headed in that direction.
- Considering management's priorities, unchanged even though now being advised on the matter, we will be rethinking our game theory on the name.
UK and the RCF:
- Management considers entering negotiations with the RCF when the UK Coach assets are sold. For this, the company would need the RCF’s consent anyway.
- Timeline for the sale is H126. NAV is £110m including buses and depots. Management are in several promising discussions, but it will take that time.
- Some RCF members have indicated what they’d be looking for, and with a fix in Germany and a deal in hand on the UK assets, management feel they would have a good position to come to an agreement.
- Management did not disclose what those indications were and is, of course, unlikely to.
- Since Flixbus entered the market, passenger numbers have overall risen, but margins are down. Management are waiting for the market to reach equilibrium and then expand from there.
- We now understand that UK Bus is making £50m losses p.a., but receives £50m in government funds. We did not know that.
Germany:
- November’s LOI came in without numbers attached, so National Express have attached numbers and set it back. Those are now subject to board meetings at all five involved PTAs this month and an extraordinary meeting of sorts in January.
- Management are looking to have a deal in principle - with figures - before the end of January.
- It is our impression that management are playing down previously raised expectations that there would be an early one-off compensation payment coming in. We have never quite believed that, because NRW doesn’t have that kind of money. Perhaps there will be payments made over time, but more likely we think that the approx. (€ or £) 100m of advances Nat. Expr. have received (all operators have received such advances) would be forgiven.
- PTA lawyers are being very careful not to set a negative precedent for the other negotiations outstanding across the country when changing the contract going forward. This is why it all takes so much time.
- Management is rightly more interested in a viable business going forward. Currently, the operation is losing -£50m p.a. and provisions at half year were higher than we thought at £150m, so good for three years. The number still reflects management’s expectations, but management was not 100% clear on the underlying scenario - is there already some deal included? We think it reflects a no-deal scenario, but management want wiggle room.
- Management consider a deal in Germany paramount before end of March (unaudited year-end accounts) as this will have bearings on the treatment/level of provisions going forward.
- Forgiveness of £100m of advances + a better deal going forward would produce significant income and lower losses going forward, but no immediate cash flow.
- Management were in NRW again only last week - suggesting a reasonable pace of negotiations.
- Meanwhile, German revenue is increasing, and there are more drivers available, but it’s, of course, a drop in the ocean.
ALSA:
- ALSA will be defending most of its concession lines, from end of 2027 onwards, when the market liberalises.
- Most impacted will be the long-haul division within ALSA. Management are considering releasing more details on divisions within ALSA, but have not given any granularity on this call.
- The long-haul division is contributing to EBITDA with approx. 30% margins. This margin would likely come down by 10 percentage points.
- We tried to triangulate with management what that would mean to the bottom line, since EBITDA overall lies around 11% at present (is it a wipe out?), but that would have depended on more detail on the significance of the long haul segment, and we did not get that.
- ALSA is looking to build up its Middle East business and certain Ambulance business in anticipation of the drop and is intending to lock in contracts where possible in advance. So the drop of that contribution should take a couple of years from early 2028 onwards.
US:
- WeDriveU is to exit Charleston in January.
- WeDriveU have set a 60-day ultimatum, which the authority will miss, following which it will pursue lengthy legal proceedings. Protocol.
- Washington Transport has shifted significant volumes to a smaller "Ma&Pa shop” without running an orderly tender process. The plan is to investigate that, attack it and then settle for something. This sounds like it will take time.
- Mobico would consider selling either remaining US business, but they have to run properly first.
Cost reduction program:
- Management are still not telling us the size of the program, other than it will be very substantial. By way of anecdote, HQ costs are £35m, and they will make £15m savings there. So if admin costs across the company are approx. £200m, we can perhaps hope to see £50m of cost improvements.
- Since this is a new management that is clearly pursuing a (very much needed) tougher line than the previous one, we are actually anticipating these plans to make a dent. Insofar as they regard ALSA and Germany, however, there will be a year's worth of restructuring one-off costs attached.
- We expect the bulk of that to come in 2026.
Miscellaneous:
- Guidance of EBITDA of £180m still confirmed.
- CapEx will be ~ £160m this year, going down to a run-rate of £120, which makes sense in a more asset-light strategy.
- Moody’s have begun their review yesterday and will conclude in January. No comment on their requirements.
- There was no comment on the payment of the coupon. A decision would be made closer to the date.
In summary, management are still working to first fix Germany, then sell UK assets, then sit down with the RCF, not all of which it needs, and then consider its options for the rest of the capital structure. In light of the consecutive constellation of these tasks, we don’t expect any significant approach to creditors before H226.
We will be working these insights into our model and will publish an update in time.
Meanwhile, we are here to discuss this name with you
Wolfgang
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk