Selling Out

There are compelling reasons why smaller operators wish to sell and good reasons why larger operators wish to buy. Next month’s purchase by Trent Barton of south east of Sheffield’s TM Travel is a classic case in point.

For TM Travel, a reliance on contract work is not the best place to be when local transport authorities contemplate a difficult financial future. TM Travel was a mid-1990s start-up, growing rapidly (and not unusually) in parallel with the public sector-funded good times, into a sizeable fleet (including by acquisitions of its own). But there are flaws, as smaller, lower cost operators come with some issues. Is Trent Barton’s Wellglade buying wisely?

1. Lower cost operators return lower margins. With no shareholders to please and provided the owners are happy, there’s no real problem. TM Travel itself relies on its lower cost buying power for its success at winning contracts. Larger operators, however, are less benevolent. Upon take-over, there are never palatable ways of increasing margins. Unless, of course, the new owner has a specific, low cost motive in retaining low margins, as we suspect in this case.



2. Lower cost operators tend to rely on contract work. Though the Local Transport Act 2008 regulations will change things, there’s currently a five-year threshold. School contracts tend to be let for three. As contracts run out, so the operation can become vulnerable. In theory, lower cost operators can only plan for the period between now and the end of the local authority contract break clause (notice period). There’s no longer-term security. It’s conceivable that the operator’s revenue base may erode. In TM Travel’s case, it relies much on home to school transport contract work, as well as its local service contractual relationship with Derbyshire & South Yorkshire PTE. Little is operated commercially.


3. With the torrid financial future ahead for local authorities, home to school transport may be safer but the returns are lower. Local bus contracts could be subject to early review. Niche operators could be in trouble.


4. If upon take-over there is investment and some necessary fleet renewal, overheads increase and, of necessity, so do contract prices. There’s the real threat of an opportunistic competitor squeezing margins to the detriment of the existing operator by forcing prices down. As a colleague once put it, the lower cost sector is many headed. Cut off one and another tends to pop up.


5. Where an operator relies on a mix of schools and tendered local bus services, there are fewer opportunities to market services (though there are exceptions). A collection of disparate, geographically spread services offer nothing more than a lack of cohesion. Trent Barton does growth on the back of marketing but may struggle in TM Travel’s case.