Rumoured GNER takeover

North train operator GNER is thought to be a takeover target for one of its UK competitors as it struggles with a financial crisis.

North train operator GNER is thought to be a takeover target for one of its UK competitors as it struggles with a financial crisis.

The company, which runs trains on the London-Newcastle-Edinburgh East Coast Main Line, is facing a multi-million pound shortfall after passenger revenues fell far short of predictions.

Parent group Sea Containers is also in serious financial difficulties and is due to meet creditors in New York this week to work out a rescue package.

In a gloomy trading update at the end of last week, Sea Containers admitted that the future value of GNER for its owner was "uncertain" and that it was seeking talks with the Department for Transport over the operator's finances.

And yesterday, rumours surfaced that one UK train operator had made an opportunistic approach to take over York-based GNER.

Possible buyers could include rivals FirstGroup, Stagecoach, Virgin or National Express. GNER beat Virgin and FirstGroup to clinch the seven to 10-year East Coast Main Line franchise last year.

Previous reports have suggested that private equity groups could be interested in GNER because of its cash generating characteristics, but the operator's declining profitability could now ward off possible buyers.

While industry figures have long maintained that GNER paid too much - £1.3bn - to the Government to secure the East Coast franchise, the full extent of the operator's financial worries were laid out at the end of last week.

Bermuda-based Sea Containers said GNER had paid the money expecting passenger revenues to rise by 9.9% in the first year of the franchise, which started in May 2005.

However, ticket sales only rose by 3.3% - leaving GNER £33m short. It blamed the 7/7 terror attacks for "more than half" of the shortfall and, while it is asking the Government for compensation, the company admits it will not cover the full cost.

The operator is also facing huge rises in electricity costs for powering its trains along the East Coast. Prices rose 28% in April and are forecast to rise another 65% next year, adding an estimated £11m a year of extra costs to GNER's projections from 2007. The decision to allow Grand Central to operate a Sunderland-London service on the East Coast Main Line will also hit finances.

Sea Containers warned: "The company has raised with the DfT the financial impact on GNER of these adverse factors and will discuss them further, although the timing and outcome of these discussions with the DfT are uncertain, as is the future value of the GNER franchise to Sea Containers."

GNER is rumoured to be looking to get the DfT to cut the £1.3bn it originally bid for the franchise and may even hand it back if it does not succeed. While that would incur a penalty of £15m, the sum is far smaller than GNER's potential losses over the coming years.

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