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What’s going on with the First Group (LON:FGP) share price?

The First Group share price erupts after receiving a £1.2bn acquisition offer. The deal was rejected but is another bid on the way?

by | Last updated 26 Nov, 2022 | Automotive

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The First Group (LSE:FGP) share price is currently hovering around 130p after surging by double-digits late last month. This momentum actually pushed the stock above pre-pandemic levels and continued the bullish run seen since the March 2020 stock market crash. Subsequently, shares are trading around 56% higher than a year ago.

So what happened? And what can investors expect to happen next in this saga?

Targetted for acquisition

As a quick reminder, First Group is a leading public transport provider. The firm operates the following companies under two brands:

  • First Bus – It is the second-largest bus operator in the UK
  • First Rail – It is the UK’s largest rail operator

The company came under the investor’s radar when news of the acquisition hit the market. First Group received acquisition proposals from I Squared Capital Advisors on 26 May 2022. According to the company’s reports, the offer extended was for a cash component of 118p per share and a contingent right up to a further 45.6p per share.

That’s roughly the equivalent of a £1.2bn acquisition offer. And as always, investors rushed to snatch up shares pushing the First Group price close to the acquisition offer. Today, the market capitalisation sits at just under £1bn.

However, the deal was rejected by management as leadership believed the offer undervalued the true potential of the business. A deadline for I Squared Capital to make another bid was set for 23 June. Given shares are currently still on the public market, this obviously didn’t happen. Yet it does appear management is still negotiating since the deadline has been extended to 21 July 2022.

Whether or not a deal will eventually be signed and approved by management, shareholders, and regulators has yet to be seen. And it’s entirely possible that no agreement is reached. Assuming this is the case, is the business itself actually worth considering for my portfolio?

Recovering from pandemic woes

First Group recently reported its full-year results for its 2022 fiscal year:

  • Revenue was recorded to be £ 5.6bn, from continued and discontinued operations altogether
    • First Rail contributed 68% of the total revenue
    • First Bus contributed 14% of the total revenue
  • Earnings per share were reported at 10.2p
  • The dividend was announced at 1.1p per share

Looking at these figures, I’m confident the First Group share price is en route to returning to pre-pandemic levels. It’s worth mentioning that First Bus passenger volume reached 76% of 2019 levels. And management is aiming to be completely restored by the end of 2023. This might be great news for investors seeking investment in travel stocks.

Time to buy shares in First Group?

The pandemic is the greatest threat the UK’s travel sector has ever faced“, said the CEO of a major air travel company.

In fact, during the peak days of the pandemic, the First Group acknowledged a “material uncertainty” about its ability to continue trading due to plummeting passenger numbers. Despite that, First Group is standing strong and continues to firmly hold its ground. At least, that’s what I think.

Takeover frenzy is prevalent in the transport sector of the UK at the moment. Just a week before this acquisition offer, another transport group, Stagecoach, was taken over by German infrastructure group DWS.

With the First Group share price currently marked lower than what a potential acceptable acquisition offer would be, there does appear to be an arbitrage opportunity. However, in my experience, that’s not the greatest investment thesis.

Only time will tell whether a deal will be reached. But suppose it’s not? In that case, I wouldn’t be surprised to see the First Group share price take quite a tumble. Personally, I think there are far more interesting investing opportunities elsewhere for my portfolio.

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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

Written By

Saima Naveed

Saima spent the early days of her career advancing the finance office of a prominent manufacturing business. After taking a sabbatical, she decided to use her expert knowledge and apply it to the stock market. Now, 10 years later, she manages a substantial portfolio built using detailed and thorough analysis.

Outside The Money Cog, Saima is an avid supporter of empowering women in the workplace. She is currently working very closely with Women of Wonders Pakistan to help other women achieve their career goals.

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Edited & Fact Checked By
Zaven Boyrazian MSc

Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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