Mobico Group Plc (LON:MCG) has announced that it has agreed to sell its North America School Bus business (School Bus) to I Squared Capital, the leading global infrastructure investment manager, for an enterprise value of up to $608 million (~£457 million1).
Transaction summary
· Enterprise value represents a multiple of ~50x School Bus’ expected FY24 Adjusted Operating Profit of $11.5 million and ~5.0x School Bus’ expected FY24 Adjusted EBITDA of $122 million (~5.6x pre IFRS 16)
· Expected upfront net proceeds2 of approximately $365-385 million (~£275-290 million1). Reported net debt further reduced following the removal of School Bus’ IFRS 16 leases of $38 million (as at 31 December 2024)
· Terms of the Transaction, and the above enterprise value, include an earn-out of up to $70 million which is dependent on certain future performance conditions. The Transaction is conditional upon certain customary conditions, including anti-trust approvals, and is expected to complete early in the third quarter of 2025
· Transaction follows a thorough process conducted since the Group announced its intention to prepare School Bus for sale in October 2023, and reflects both the operational improvements achieved in School Bus to drive a recovery in profitability following the pandemic, as well as the ongoing headwinds faced by the business
· Enables the reallocation of cash flows from the capital-intensive School Bus business, which will allow the Group to continue to focus on deleveraging, alongside funding attractive growth opportunities, particularly in ALSA. In line with the Group’s commitment to strengthen its balance sheet, net proceeds will be retained to reduce net debt
· I Squared has an excellent track record in the sector and is well positioned to be a good custodian of the business, supporting its future growth and investment requirements
· Transaction unanimously supported by the Board and considered to be in the best interests of shareholders
· The Group expects to deliver FY24 Group Adjusted Operating Profit in line with, albeit at the lower end of, guidance and School Bus is expected to contribute approximately £9 million to FY24 Group Adjusted Operating Profit, in each case, subject to final audit
· As previously announced, Mobico will publish its full year results for the year ended 31 December 2024 on 29 April 2025
1 Translated illustratively at a GBP / USD rate of approximately 1.33 based on the rate as at close of business on 24 April 2025.
2 Net upfront proceeds for covenant deleveraging, after deduction for debt-like items including IFRS 16 leases, deferred capital expenditure, and other items, as well as transaction fees. The Net Proceeds figure does not include the earn-out amount. The final amount of Net Proceeds will be subject to customary completion adjustment by virtue of the completion accounts mechanism and dependent on the timing of completion.
Ignacio Garat, Group Chief Executive of Mobico Group, commented:
“This agreement is a significant milestone for Mobico. It is a first step in strengthening the Group’s balance sheet and will allow us to reallocate resources away from a capital-intensive business as we focus on continued deleveraging alongside funding our pipeline of growth opportunities, especially in ALSA. The Transaction follows a comprehensive process and reflects the work that has been carried out with the School Bus management team to improve its performance over the last 18 months as well as the ongoing headwinds. In I Squared, we have found an owner with considerable experience in the sector that will invest in the future of the business. We are continuing to review options to further accelerate the Group’s debt reduction and deleveraging.”
Tim Wertner, Chief Executive of School Bus, commented:
“Since I joined the business in June 2023, our focus has been on recovering lost routes, securing new contracts, recruiting and retaining drivers and delivering price rises above inflation. I am pleased that our success has attracted a buyer of I Squared’s quality and we look forward to partnering with I Squared to deliver the growth opportunities ahead. I am confident that with our new owners we will be ideally placed to continue delivering for our people and for the communities we serve. I would like to thank everyone at School Bus for their hard work and commitment in creating the business we have today.”
Gautam Bhandari, Global Chief Investment Officer and Managing Partner at I Squared, commented:
“School transportation is more than just a daily commute. It’s a vital link to education, which underpins a functioning society regardless of stage in the economic cycle. We are proud to add this essential service to our portfolio and look forward to continuing to support its growth.”
Introduction and Background to the Transaction
As announced on 12 October 2023, the Mobico Board concluded, in line with the Group’s disciplined capital allocation approach and focus on reducing debt and leverage, that the capital-intensive School Bus business would be prepared for a potential sale.
Since the pandemic, Mobico has sought to address the long-term challenges which the pandemic created for School Bus. Following the appointment of a new leadership team in 2023, significant operational improvements have been made, focused on improving driver retention and recruitment, route reinstatement, and improved contract pricing. The business has also improved fleet allocation which has led to better asset utilisation, cash flow and customer satisfaction. All of these culminated in School Bus delivering a net positive route outcome for the current school year bid season, the first in over a decade.
However, whilst School Bus has demonstrated its recovery from the pandemic’s effects, it continues to require significant maintenance and growth capital investment and has experienced persistent market challenges such as driver wage inflation and, more recently, potential fleet cost inflation from new tariffs.
Today’s announcement reflects a thorough process with a broad potential buyer universe, and the Board is pleased to have agreed the terms of the Transaction with I Squared.
Transaction Rationale
Delivers on the Group’s commitment to accelerate net debt reduction
In line with the Group’s commitment to strengthen its balance sheet, following completion of the Transaction, the Net Proceeds (defined below) will be retained, accelerating a reduction in the Group’s net debt position.
Whilst the Transaction marks an important step forward, the Group remains focused on further debt and leverage reduction and will continue to evaluate options to further accelerate the strengthening of its balance sheet. This includes the organic initiatives the Group announced at its interim results in August 2024. These ongoing initiatives are targeting cash improvement and debt reduction and include tightened controls over capital expenditure. A further update on these initiatives will be provided on publication of the FY24 results.
Enables the Group to reallocate cash flows from the capital-intensive School Bus business
School Bus operates in an attractive and fragmented market, but is capital-intensive, requiring significant investment to grow. For the years ending 2022, 2023 and 2024, School Bus has required capital investment of over £200 million in total, without generating meaningful positive free cash flow to support Group deleveraging.
I Squared has an excellent track record in the sector and is well positioned to be a good custodian of the School Bus business. I Squared has been clear in their intentions to support the existing management team as they continue to grow School Bus as an independent business and invest in its future opportunities.
Creates a simplified portfolio with a stronger platform to delever alongside flexibility to fund the Group’s pipeline of attractive growth opportunities, particularly in ALSA
The Transaction is expected to be broadly neutral to covenant leverage initially, with future deleveraging supported by the Group’s remaining businesses and, in particular, ALSA’s future growth and cash flow generation potential.
The Group continues to see positive passenger demand across its businesses and a strong pipeline of new business opportunities, having secured important contract wins and delivered successful retentions and mobilisations. As with a number of these recent contract wins, whilst requiring upfront investment, they provide strong and stable returns and cash flows for the Group going forwards. The increased financial flexibility the Transaction provides, combined with its ongoing operational controls, will allow the Group to focus on its higher growth and more cash generative businesses going forwards, and will allow the Group to delever over the coming years towards its target covenant leverage range of 1.5-2.0x.
Alongside a focus on deleveraging, the Transaction is expected to enable Mobico to focus and take advantage of its pipeline of attractive growth opportunities, particularly in ALSA, which is expected to enable the Group to generate more attractive returns and predictable cash flows.
WeDriveU, the Group’s North America transit and shuttle business, is not part of the Transaction. WeDriveU has been successfully carved out and separated as part of the sales process to be able to report as a standalone business.
Net Proceeds and Use of Proceeds
At completion, Mobico is expected to receive approximately $365-385 million (~£275-290 million1,2) in upfront net proceeds for covenant deleveraging, after deductions for IFRS 16 leases, other debt-like items within School Bus including deferred capital expenditure, other items and transaction fees (the “Net Proceeds”).
Reported net debt will be further reduced following the removal of School Bus’ IFRS 16 leases of approximately $38 million (as at 31 December 2024).
The final amount of Net Proceeds will be subject to customary completion adjustment by virtue of the completion accounts mechanism agreed with I Squared and dependent on the timing of completion.
After repayment of School Bus non-IFRS 16 leases (approximately $75 million as at 31 December 2024), the remainder of the Net Proceeds will initially be held as cash.
The Board continues to consider the £500 million hybrid bond as a core element of the capital structure, providing important financial flexibility as the business continues to balance deleveraging with investment for growth. Any decisions about the hybrid – or any other element of the capital structure – will be taken at the appropriate time.
Financial Effects of the Transaction
As noted above, with the Net Proceeds initially used to reduce the Group’s net debt, the Transaction is likely to be dilutive to Group earnings in the short-term. Over time, however, the Group will seek to balance continued deleveraging whilst focusing on opportunities to drive incremental earnings and cash flow growth and value accretion for shareholders.
Given the impact of the Transaction, the Board will review the Group’s medium-term financial targets and will provide an update in due course.
During 2024 and 2025, Mobico will incur restructuring costs relating to the separation of School Bus as well as incremental costs as a result of separation and redeployment of central costs. Mobico will however benefit from cost efficiencies as it transitions over time to a simpler North American organisational structure. WeDriveU will be reported as a separate business division going forward.
The Group will retain responsibility for certain liabilities that School Bus incurred pre-completion of the Transaction, including approximately £65 million of provisions (as at 31 December 2024) in relation to historical claim liabilities.
Risks to Mobico as a result of the Transaction
Following the Transaction, the Retained Group (defined below) will have greater concentration risk, holding fewer asset classes, and will therefore be more susceptible to adverse developments in the remaining markets, asset classes and segments in which the Retained Group operates. Therefore, should any part of the Retained Group underperform, this may have a larger relative impact on its financial condition, results, profitability, and/or future prospects than it would have had on the entire Group before the Transaction.
The geographical distribution of the Retained Group’s revenue after the Disposal will also be different to that of the Group’s as at the date of this announcement. This means that adverse financial market movements or economic conditions in the region and/or in one of the markets in which the Retained Group operates may have a larger relative impact on the financial condition, results, profitability and/or future prospects of the Retained Group than they would have done prior to the Transaction.
The Transaction includes an earn-out of up to $70 million, payable by I Squared to Mobico, contingent on School Bus meeting certain financial performance thresholds over a 3-year period post-completion of the Transaction. There is a risk that these thresholds may not be met for one or more of the relevant years, which would result in Mobico not receiving the earn-out payments for the relevant year.
The Transaction has also required, and will continue to require, substantial amounts of time and focus from the management teams and employees of the Group which could otherwise be spent operating the Group in the ordinary course. Key managers and employees may become distracted by the Transaction and, accordingly, decision-making by the Group may be delayed, deferred or otherwise impacted. This disruption could be prolonged if completion of the Transaction is materially delayed.
Current Trading for the Group
Since 30 June 2024, the Group has continued to deliver good revenue growth and expects to deliver FY24 Group Adjusted Operating Profit in line with, albeit at the lower end of, guidance. The Group expects to deliver a significant statutory loss as a result of goodwill write-offs, derecognition of deferred tax assets and further Onerous Contract Provisions relating to its German business.
ALSA has delivered another strong result for 2024, continuing to grow across a diverse portfolio. WeDriveU, newly separated and strengthened, continues to make encouraging progress with several important contract wins. Whilst revenue remains stable, performance in the UK & Germany continues to reflect the challenges faced in both of these businesses and, in particular, by the continuation of industry-wide challenges in German Rail, with discussions with the local PTAs ongoing and remaining constructive, though not yet completed. As a result, UK & Germany is expected to deliver a negligible Adjusted Operating Profit/Loss for FY24, with a further approximate £85 million charge to the Group’s FY24 statutory result relating to an increase in the German Rail onerous contract provision.
School Bus has delivered improved growth in 2024, reflecting the first net-positive route outcome for this school year bid season in over a decade. As set out in Appendix I, School Bus is expected to contribute approximately £9.0 million to FY24 Group Adjusted Operating Profit. The Group’s FY24 statutory result will include a non-cash impairment to the carrying value of School Bus of approximately £550 million. Following completion of the Transaction and the detailed exercise to be completed following finalisation of the customary closing accounts process, the Transaction may result in a further non-cash exceptional charge in FY25 as a loss on disposal.
The Group’s FY24 statutory result after tax will also include a non-cash write-off of deferred tax assets of approximately £200 million. This will not affect the Group’s ability to utilise those tax losses in future years.
Further details of the FY24 financial performance will be shared during the Annual Results presentation.
Trading in the first few months of the current year across the Group is in line with the Board’s expectations.
Board Approval of the Transaction
The Mobico Board has unanimously approved the Transaction and believes the terms of the Transaction are in the best interests of Mobico shareholders as a whole.
Additional Information and Timing
The Transaction is a significant transaction for Mobico for the purposes of the Listing Rules of the Financial Conduct Authority and is therefore notifiable under UKLR 7. The Transaction is also conditional on certain customary conditions, including regulatory and antitrust approvals. Completion of the Transaction is expected early in the third quarter of 2025.
Investor and Analyst Briefing
The management of Mobico will host a presentation for analysts and institutional investors at 9am BST on Tuesday 29 April 2025 to discuss today’s announcement as part of the Group’s results for the year ended 31 December 2024.
