There is more information available in the presentation press release
Operational and financial overview
RATP London was formed through the consolidation of London United, London Sovereign and London Transit bus companies.
RATP London is most prominent in West London, and also operates in the north-west and south-west of the capital. RATP London has c.3,700 employees and operates a fleet of c.1,000 buses out of four owned and six leased depots, as well as a number of smaller ancillary properties, in Central and West London. The four freehold depots have existing use value of c.£50m. The freehold depots are located in Fulwell, Hounslow, Shepherds Bush and Stamford Brook, with leasehold depots in Edgware, Harrow, Hounslow, Park Royal, Tolworth and Westbourne Park.
The majority of the senior management team joined the company over the last three years and have developed and implemented a comprehensive turnaround plan for the business. Good progress has been made since the implementation of the plan, both in enhanced bid discipline with c.30 routes rebid over the past two years, including the early termination of loss making routes at contract review dates as well as improved operational performance and cost control, and workforce stabilisation. This improvement in performance can be seen in the TfL Q2 FY 2025 Bus Operator League Tables, with the three subsidiaries occupying first, second and fourth place in the league table for “operated mileage before non-deductible losses”.
RATP London operates c.90 routes on behalf of TfL. These route contracts typically have a seven year maturity with on average, c.13 contracts in the portfolio renewed each year. As the route contract portfolio evolves over the next five years, the Group anticipates that annual revenues will grow to £300-350m, with operating margins in line with historical norms in London of c.6-7%.
RATP London reported group revenues of £271m for the year ended 31 December 2023. The Group anticipates that the Acquisition will be broadly earnings neutral in FY 2025 and FY 2026, after the utilisation of onerous contract provisions of c.£40-50m that recognise contracts entered into prior to 2022 and were subsequently impacted by material labour market cost increases. The Group will recognise these provisions on acquisition. The onerous contract loss provision release matches the losses being incurred on these contracts and will result in a broadly neutral impact in the Group’s profit and loss accounts.
Buses are currently acquired under operating leases, which the Group will review going forward. The Group anticipates aggregate capital expenditure of c.£40-50m which excludes bus acquisitions, over the first three years of ownership relating primarily to depot electrification, charging infrastructure, existing fleet replacement batteries, and a small amount of spending on other non-current assets. The capex forecast excludes the buses that may be acquired under operating leases and this will be reviewed in the context of the Group’s wider approach to electrification.
TfL is targeting an entirely zero-emission bus fleet by 2034 at the latest and electrification is now compulsory in the bidding process. RATP London has been an early mover in bus fleet and infrastructure electrification, with a third of the fleet electric.
The Group will seek to capitalise on electrification expenditure efficiencies through its existing capabilities and arrangements. The Group anticipates operating cash outflows of c. £30m after bus operating lease payments and capex, in the first two years of ownership, with the business expected to be operating cash generative from FY 2027 onwards.
Looking ahead, in addition to the measures included in the current turnaround plan, the Group has identified a number of synergies that could further enhance profitability. These include fuel and electricity pricing, insurance, on bus advertising, materials contracts, fleet purchasing, vehicle sale benefits through the use of the Group’s Ensignbus business, and through the merging of some back-office functions. The Group will also consider the future financing of electric buses, including the potential benefits of bringing electric bus batteries into its joint venture with Hitachi Zero Carbon.
Impact on the Group’s FY 2025 and FY 2026 financial outlook
FirstGroup plc 3 Should the Acquisition complete in the fourth quarter of the Group’s financial year ending March 2025, it is anticipated that its FY 2025 net capital expenditure will be c.£125m and year-end adjusted net debt will be c.£110m. The Group will also recognise additional IFRS16 lease liabilities of c.£60m in FY 2025.
In FY 2026, RATP London is anticipated to make a small contribution to the First Bus adjusted operating profit, at a lower margin, and the Group’s net capital expenditure is expected to increase to c.£125m, with the majority of expenditure in First Bus electrification. There will be an increase in the Group’s interest cost of c.£6m, including IFRS 16, relating to the Acquisition, and the Group’s FY 2026 year-end Adjusted net debt is expected to be c.£130m. Share Purchase Agreement terms
Under the terms of the Share Purchase Agreement (‘SPA’), FirstGroup plc will acquire, through its whollyowned subsidiary, First Bus Holdings Limited (‘First Bus’), the entire issued share capital of RATP Dev Transit London Ltd and its three operating subsidiaries, London Transit Limited, London Sovereign Limited and London United Busways Limited, from RATP Dev UK Ltd (the ‘Seller’), a wholly-owned subsidiary of RATP Dev. The consideration will be paid in full on completion, subject to a normal post-completion true-up process. The entire debt of RATP London will be assumed or repaid by the Seller’s group prior to completion, apart from the debt relating to hire purchase and lease finance obligations (projected to be c.£45m as at 31 December 2024) which are expected to remain with RATP London at completion.
The Group has provided a parent company guarantee to underpin the obligations of First Bus under the SPA, and similarly the Seller’s parent, RATP Dev, guarantees the obligations of the Seller. The SPA includes a customary suite of warranties and indemnities, subject to caps and limitations as appropriate.
The Seller is required to carry on operating and funding the business in line with past practice in the period to completion. A limited suite of transitional services will continue to be provided by the Seller and its group for a short period post-completion under the terms of a Transitional Services Agreement (‘TSA’). Satisfaction of the conditions is subject to a longstop date of 30 April 2025. The current management team will transfer with the business and are expected to be retained post-acquisition.
London bus market1
London is a £2.1bn bus market, accounting for around 46% of the entire UK bus market. There are c.9,000 buses in London, with the market primarily served by six major operators.
Bus patronage is expected to continue to recover back to pre-Covid levels, supported by modest population growth across London, further growth in tourist volumes, continued declines in car utilisation and investment in the expansion of the bus network. TfL’s Business Plan expects bus patronage to grow at c.4% per annum between 2025 and 2027, recovering fully to pre-Covid levels by 2027.
Looking at modal share, despite a slight shift towards the London Underground and more recently, suburban rail networks, bus remains the primary mode of transport within London, with an average of 192 journeys per capita in 2023 (accounting for >50% of all journeys made).
The size of the London bus network has also been resilient, with a broadly stable number of network miles operated between 2012 and 2020, and only a very modest decline between 2020 and 2024. This reflects the consistent levels of funding allocated to support operators, with long-term funding growth of c.3% per annum between 2004 and 2023 demonstrating TfL’s commitment to bus. In 2023 Bus accounted for approximately 25% of total TfL operating expenditure (equivalent to £2.1bn per annum).
Overview of TfL contracts
London bus operations are entirely regulated by TfL, with each individual route forming a contract which is bid for by authorised private sector operators. TfL decide the contract specifications for a given bus route, control ticket prices and collects passenger revenue. Operators own the buses and depots, and source and pay drivers to run routes. The proximity of the line of route to the operator’s depot and staff changeover facilities is therefore key to maximising efficiency and being competitive on bid price.
Individual route contracts are tendered competitively by TfL, generally over seven-year terms, resulting in a franchising model where there is minimal risk of losing large parts of the business at one time, and with a view to full decarbonisation of the fleet.
The route contracts bear no revenue risk on the base price bid. Inflation is allowed for based on 85% of revenue against which CPI is applied, and TfL assuming 15% of bus operator cost base does not inflate.
TfL is entitled to make deductions for lost mileage (at a specified rate per mile) where caused by reasons within the operator’s reasonable control (such as missing drivers or mechanical breakdown), and fares payment irregularities (i.e. underpayment by passengers). Operators are not penalised for lost mileage that is not within their control, for example traffic or roadworks delays.
In addition, operator performance is measured and incentivised / penalised through quality of service indicators within the contracts, known as Quality of Service Indicators (‘QSIs’). Under the QSI regime, bonus payments and liquidated damages are based on the operator’s performance against a defined minimum performance standard of Excess Wait Times (‘EWT’) or a minimum percentage of “On-Time” services. Bonuses are earned up to an annual maximum 15% of contract payments (less any deductions for lost mileage) (the ‘Contract Sum’) for good performance, with liquidated damages for poor performance capped annually at 10% of the Contract Sum. 1Source: TfL data
