Financial News

National Express (LSE: NEX.L - news) may as well be walking around with a target sign on its back. Earlier this week it rejected one bid; now it may have to deflect a whole lot more.

For months the problems of the loss-making east coast rail franchise have dogged investors. But the scrapping of the east coast franchise, with the losses crystallised at about £72m ($118m), puts the company back in the line of fire.

"Drawing a rule under east coast removes a big deterrent for prospective suitors," said Douglas McNeill, analyst at Astaire Securities. However, he added that the Department for Transport's reaction suggested that the risk of the group having to surrender its two other rail franchises had not disappeared, "nor has the debt burden".

The most likely bidder is FirstGroup (LSE: FGP.L - news) , whose initial all-share takeover bid was rebuffed by National Express earlier this week. Analysts said that given both businesses were active in the US and UK bus markets, there remained considerable logic in a deal. "It is unlikely to be the end of First Group's interest in the proposition," said Mr McNeill.

A merger or a rights issue may also prove more appealing to National Express shareholders, now that the uncertainty over the east coast franchise has been dispelled. When it rejected the takeover bid on Monday the company said it was "inappropriate" to enter talks with FirstGroup so long as the negotiations with the government remained in play. On Wednesday, the first obstacle to those discussions had, for good or ill, been overcome.

But while the company signalled for the first time that it regarded a rights issue as a serious option, investors might be worried by the lack of clarity over the successor to Richard Bowker, the outgoing chief executive.

On Wednesday, National Express was keen to suggest that its own "self-help" measures would help it pay down its £1.2bn debt mountain, £534m of which has to be refinanced by September 2010.

While acknowledging that all parts of the business were struggling with "difficult conditions", Jez Maiden, finance director, claimed it was making good progress in generating cash, citing the renegotiation of its debt terms and the cutting of its dividend as examples. It said it had raised £33m of a total £100m it planned to save this year.

Nevertheless, it said it would consider selling off other non-core parts of the business, as well as sale and leaseback deals on its properties.

It said it was confident it would retain its other two, more profitable rail franchises in Britain.