FirstGroup chief Tim O'Toole offered to quit with chairman over £2bn debt

Transport firm CEO, who was told by Martin Gilbert to carry on, spearheading courtship of big investors over £615m rights issue

FirstGroup's chief executive, Tim O'Toole, will this week visit its biggest institutional investors to secure backing for the troubled transport operator's £615m rights issue, as it emerged that he offered to quit instead of the chairman.

Martin Gilbert announced his resignation last week after the group concluded it could no longer continue struggling with its £2bn debt. Sources close to the company said O'Toole had, in a private conversation, told the chairman he would also consider his position, but Gilbert said he should carry on.

O'Toole will steer First through a £1.6bn programme of investment over the next four years – primarily in renewing its ageing bus fleet. After the west coast mainline fiasco, in which it missed out on the lucrative railway linking Britain's biggest cities, it would be natural to blame rail for its troubles. But the malady that has forced the firm's rights issue was incubated in the mode of transport it knew best: the bus.

The company, which bills itself the "world's largest public transport operator in private hands", began with a small municipally owned bus company in a far corner of Scotland. Formed from a management buyout under privatisation and a merger with south-west England's Badgerline, the new FirstGroup plc was little more than a decade later striking a deal that would make it the biggest player in key US markets – but at a cost that it is finally having to address.

Borrowing billions, First acquired US transport firm Laidlaw in 2007, and now provided 40% of school bus services across the States. But the takeover did not go to plan: attempts to reduce the debt to a manageable sum by hiving off the newly acquired Greyhound coach service to another buyer fell through. The school runs on a 54,000-strong fleet of the yellow buses did not generate the anticipated profits, and First's share price fell while the group's debt burden made the ensuing bumps in the road ever harder to absorb.

The services it runs in about 40 towns and cities in Britain also began to run into trouble. Passengers were deserting deteriorating, clumsily managed services, with routes slashed and fares pushed up, to the point that there were campaigns and protests against the operator in cities such as Bristol. Changes in government grants and support for concessions exacerbated problems in a bus business that had been generally regarded as a safe cash cow, leading to a profits warning last year.

These headwinds and growing questions over the group's debt partly explain why First bid so keenly for the west coast mainline – a bid so high that rival Sir Richard Branson, the Virgin boss, branded it "insanity", though O'Toole has consistently defended it since. Instead of securing the bandage of a lucrative rail franchise, First licked its wounds as the government paused the entire rail franchising programme, a delay that diminished options beyond the long-resisted rights issue – one being considered even when US railwayman O'Toole joined the board four years ago.

 What First now describes as an "albatross" was debt that peaked at £2.6bn after the acquisition of Laidlaw. While the debt was being eroded – partly through selling assets – fears that rating agencies would downgrade First's creditworthiness to junk status, piling on financing costs, forced the group's hand.

Douglas McNeill, a director at investment firm Charles Stanley, said: "Pressing on without a rights issue wasn't doomed to failure, but it was risky: when you have a lot of debt you need everything to go well. You're vulnerable to events.

"Had they done it earlier when the share price was higher it would have been less painful, less dilutive for shareholders."

Those shareholders include at least 8,000 FirstGroup staff who have been part of a long-term share buying scheme, and would likewise have seen their nest eggs slashed by a third last week as the share price nose-dived for the second time in seven months. The RMT union said: "Low-paid guards and platform staff have been propping up the share price with a scheme that might see them losing all their money – and now potentially their jobs because of the chaos at the company." First dismissed the union's claims that the schemes had been closed or that jobs were at risk.

The one man who did lose his job, Gilbert, was a director of First running buses in Aberdeen when Sir Alex Ferguson was still managing the local football club, and has overseen a similar transformation in the scope and scale of the business as Fergie at Manchester United. Analysts believe one sacrificial lamb will be enough to appease shareholders, and O'Toole will have some breathing space.

A First spokesman insisted the rights issue, which should be ratified by shareholders on 10 June, is "good news: we can pay down debt, this is a licence to invest and grow, even if the share graph over 24 hours looks terrible – it's what analysts were expecting". McNeill concurs: on First's prospects, he is "optimistic – for the first time in a while".

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Article source : http://www.guardian.co.uk

Property price rises stoke fears of a new housing bubble

House prices grew by 0.4% in May – the faster at any time in the past six years – figures from Hometrack show

Fears that George Osborne, the chancellor, is stoking a new housing bubble through plans to boost mortgages may be exacerbated by figures showing house prices grew faster in May than at any time in the past six years.

Prices rose 0.4%, the most since May 2007, driven mainly by the market in London and the south-east – although the rest of the UK also averaged a marginal rise.

Data from Hometrack, a property analytics firm, shows prices grew by 0.9% in the capital last month, and by 0.5% across the south-east.

The number of people looking to buy grew almost 15% in London over the past six months but the number of available properties declined, creating the biggest gap between supply and demand for more than four years.

The average time a sale takes in London is now one month – a third of the time taken in the East Midlands.

Outside London and the south-east, the picture was more mixed. Prices were static in four regions (the north-east; north-west; Wales; and Yorkshire and Humberside) and grew in a further four (East Anglia; East Midlands; West Midlands; and the south-west).

 Richard Donnell, Hometrack's director of research, said: "While levels of demand have been increasing each month, the total growth in buyer numbers has been broadly in line with that seen in recent years. But it is a lack of housing to buy that is driving the acceleration in prices.

"High moving costs, uncertainly over the outlook for jobs and a lack of available housing to move to means homeowners remain unwilling to put properties on the market. This is only serving to limit supply further."

Donnell said he expected to see more "mini housing cycles" with more sellers entering the market but demanding unrealistically high prices. Currently, though, sales are going through at 93.9% of asking price – the highest since summer 2010.

Last week the average price of a home in London passed £500,000 for the first time, according to the property website Rightmove.

In his March budget, Osborne unveiled a Help to Buy scheme giving partial guarantees for billions of pounds worth of low-deposit mortgages, allowing more people to get loans without a big deposit, as well as providing government loans. But observers including the Royal Institute of Surveyors and the outgoing Bank of England governor, Sir Mervyn King, say the plans risk fuelling a new bubble and warping the market at the expense of new buyers. 

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Britain is a lab rat for George Osborne's austerity programme experiment

There is no evidence – and never has been – that austerity works in the fashion promised by those who support it

What do you think about George Osborne's austerity programme? No, I am not trying to be funny. When the chancellor says he is tackling Britain's large budget deficit through a mix of spending cuts and tax increases are you more or less likely to go out and spend money?

The answer to this question appears obvious to most people. Austerity makes consumers and businesses more cautious. It leads to less spending in the economy and throws deficit reduction programmes off track.

That, though is not what Osborne thinks. It is not what the European Central Bank thinks. It is not what the Tea party in the United States thinks. It is not what most mainstream economists think. What they all believe is that any pledge by governments to cut spending imparts a warm glow to those toiling away in the private sector. Confidence blossoms because individuals and businesses expect healthier public finances to result in lower taxes. Businesses will invest and this will lead to higher consumer spending.

Conversely, any attempt by governments to spend their way out of a slump is worse than useless. Perfectly rational economic agents understand that higher public borrowing today means higher taxes tomorrow, and they will prepare for that dread day by reining in investment and spending. The economy will shrink rather than grow.

Let me guess what you are thinking? You are thinking that this sounds like complete mumbo jumbo and bears no relation to the real world. You think that expansionary fiscal contraction – the economic idea used to justify austerity – is a contradiction in terms. You think that there is not one shred of evidence to support the idea that government belt-tightening in a deep slump does anything other than to make that slump deeper and longer.

And you would be absolutely right. There is no evidence – and never has been – that austerity works in the fashion promised by those who support it so vehemently. Britain – used as a laboratory rat in order to prove that expansionary fiscal contraction works – is proof of that, as are the examples of Ireland, Greece and Portugal.

The UK experiment began three years ago when the coalition came to power. The timing could hardly have been better for the new breed of expansionary fiscal contractionists at the Treasury. The deficit was at a peacetime record, the economy appeared to be on the turn and, as an excellent new book by Mark Blyth* shows, it was the time when the brief one-year dalliance with Keynesian economics had just hit the buffers.

What happened was this. In the winter of 2008-09, following the collapse of Lehman Brothers, the world economy contracted at a rate not seen since the early 1930s. Governments decided this was not the time to sit back and do nothing: they got together and co-ordinated the biggest expansion of monetary and fiscal policy on record. The Americans, the Chinese, the British, all cut interest rates and announced stimulus packages. Even the fiscally conservative Germans joined the party.

The unprecedented intervention by central banks and finance ministries prevented a second great depression, but the healing process had only just begun by early 2010. At that point, the narrative changed. As Blyth correctly points out in Austerity: The History of a Dangerous Idea, the crisis began with the banks and it was only when states moved in to re-capitalise institutions that were on the brink of bankruptcy that a private sector debt crisis became a sovereign debt crisis. With the sole exception of Greece, the financial problems faced by western governments did not stem from the profligacy of the state but were the result of taxpayers picking up the tab to bail out the banks.

But this view was quickly challenged. Within months, as Blyth says, it was re-christened a sovereign debt crisis by political and financial elites. Why? In part, it stemmed from the ingrained belief that markets are infallible and governments can never do any good. In part, it stemmed from a genuine – if misguided belief – that government debt levels would explode to unacceptable levels unless austerity was introduced. In part, it was a way to ensure that the people who were actually responsible could shift the burden of clearing up the mess onto those who were quite blameless.

Those determined to push back against the Keynesian experiment came armed with economic evidence. The Italian economist Alberto Alesina made the case for expansionary fiscal contraction when he presented a paper to EU finance ministers in April 2010, citing examples of countries – such as Ireland in the late 1980s – where the approach was supposed to have worked. Jean-Claude Trichet, then president of the European Central Bank, was impressed. So was Osborne, who drew on Alesina's work in his emergency budget of 2010.

Vicious circle: the IMF says spending cuts are more painful when every country is retrenching at the same time and has urged George Osborne to boost spending

Blyth's book traces austerity back to its roots in the works of John Locke, David Hume and Adam Smith, but is particularly impressive in the section that takes apart claims that the last 30 years have provided examples of expansionary fiscal contraction working. Alesina's version of what happened in Ireland in 1987-9 is that an austerity minded government delivered growth by cutting welfare, taxes and the public sector wage bill, with the fiscal tightening offset by a devaluation of the punt. This explanation, however, fails to mention that Ireland's biggest export market is Britain, which at the time was going through the wild excesses of Nigel Lawson's ill-fated boom.

And so it goes on. Blyth has plenty of examples – Britain in the 1920s, for example – where austerity failed. He finds none – not even the recent case of Latvia – where it does what it says on the tin.

IMF economists have done a good job in challenging the claims of the expansionary fiscal contraction brigade. The fund found that the notion that spending cuts are less harmful to growth than tax increases – one of the chancellor's key claims – only holds true if central banks can compensate for the contraction with reductions in interest rates. When official borrowing costs are just above zero that is not possible. The IMF also says spending cuts are more painful when every country is retrenching at the same time, as now.

In short, it believes that austerity isn't working. It believes the US has recovered more quickly than the eurozone because of Washington's belief that growth leads to deficit reduction rather than the other way round. It says Britain's economic recovery is feeble and wants Osborne to boost spending on public infrastructure in order to offset the £10bn of tax increases and spending cuts he has lined up for 2013-14. So ask yourself one final question. If Osborne borrowed £5bn-£6bn to build houses and fix potholes would that be a good or bad idea? Most of us, I would suggest, would take the former view, which is why austerity has failed and why the economic thinking that underpins it is bunk.

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Article source : http://www.guardian.co.uk