Yesterday, after weeks of negotiation, it was announced that National Express (LSE: NEX) has agreed a share-based takeover of Stagecoach. Here, Stagecoach shareholders will get 0.36 National Express shares for every one they own, meaning they will own around 25% of the combined company. This will bring together two of UK’s largest public transport operators, provided that the Competition and Markets Authority doesn’t have any objections. I feel that this acquisition makes perfect sense, and this is why I’d buy the FTSE 250 stock today.
Why am I so optimistic about the acquisition?
Firstly, the merger is likely to create significant synergies, which is expected to lead to cost savings of around £45m. This is higher than the original estimate of £35m. These costs savings will be achieved through sharing depots and around 4o job cuts from head offices and corporate departments.
Further, the acquisition values Stagecoach at £470m, and I think that this undervalues the company. Indeed, even in the face of multiple lockdowns, Stagecoach still made revenues of £928m last financial year. Partially due to the government support that it received, it also made statutory pre-tax profits of £24.7m. Things have further improved in the first half of this financial year, with operating profits totalling £32.9m and revenues totalling nearly £600m. As such, with it valued at just £470m, I think the company seems like a bargain. This makes it a very shrewd acquisition for National Express.
By acquiring another FTSE 250 stock in the transport industry, I feel this is a sign of major optimism from National Express. This is because it shows a genuine belief that the transport industry can recover from the pandemic. I’m hoping that this optimism can pay off in the long term.
Risks for the FTSE 250 stock
Despite these signs of optimism, things still seem very uncertain in the travel industry at the moment. This is particularly true considering the rise of Omicron in recent days. There is a possibility that this could provoke a new lockdown, which would have devastating consequences for National Express, as travel would be halted.
While this seems like a worst-case scenario, the new variant is likely to cause more wariness among consumers. This may prevent many from travelling. As such, there is a risk that the recovery will be hindered. This must be taken into consideration.
Despite these risks, I still feel that the strengths of this FTSE 250 stock are too strong to ignore. In fact, in addition to the company’s presence in the UK, which should be bolstered through the recent acquisition, National Express has a strong presence in both North America and Spain. Accordingly, I believe that the transport operator is well-positioned for the future. This will hopefully allow it to be at the forefront of the post-pandemic recovery. Therefore, I’m very tempted to add some more National Express shares to my portfolio.
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Stuart Blair owns shares in National Express Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.