Sandell Provides Update on Its Engagement With FirstGroup

LONDON, January 15, 2014 /PRNewswire/ --

Urges FirstGroup to reconsider its premature rejection of the Sandell Plan

Publishes White Paper detailing the operational and financial benefits of the Sandell Plan

Believes there is strong shareholder support for its ideas

Sandell Asset Management Corp. ("Sandell"), a significant investor in FirstGroup plc. ("FirstGroup" or the "Company") with an interest of approximately 3.1% of the Company, has today written to the Board of the Company.

On 11 December 2013, Sandell Asset Management welcomed the appointment of Mr. John McFarlane to succeed Mr. Martin Gilbert as Chairman of FirstGroup and urged the Company to take certain steps to drive long term operational and strategic performance and unlock shareholder value (the "Sandell Plan" or the "Proposals").

In the letter sent to the Board of FirstGroup today, Sandell welcomes the Board's statement that it remains open to shareholder feedback. However, Sandell urges the Company to reconsider its premature rejection of the Proposals. The letter is accompanied by a White Paper which sets out the details, the benefits and the technical feasibility of the Sandell Plan
(available at: http://www.sandellmgmt.com/news/FirstGroup_White_Paper_Jan2014.pdf).

Sandell also states that, following its detailed discussions with the Company, it has considered the relatively minor issues raised by the Company. Sandell has updated its analysis to address these issues and to take into account changes in market conditions since its discussions with FirstGroup began. The White Paper includes this updated analysis.

The White Paper includes detail of why Sandell believes the Proposals would provide the following operational and financial benefits to the Company:

Operational benefits

• Stronger and clearer focus
• Better incentives for management
• Improved accountability to shareholders
• Improved transparency
• Additional cash for reinvestment

Financial benefits

• Improved valuation of FirstGroup US
• Lower overall cost of capital
• Reduced debt and lower interest payments

The Sandell Plan also addresses what it believes is the key reason behind the Company's consistently poor execution, namely the increased complexity of the business since the acquisition of Laidlaw International Inc.

Sandell believes that, if the Sandell Plan were to be implemented, both FirstGroup US^[1] and New FirstGroup^[2] would be focused businesses with independent accountable boards, right-sized balance sheets and motivated management teams that are appropriately incentivised to deliver long-term returns to shareholders.

Sandell emphasised that the Sandell Plan is not a replacement for a sound turnaround plan. Instead, Sandell believes the Proposals are best carried out in conjunction with such a plan to improve the plan's chances of success. Although Sandell believes the basic tenets behind the Company's strategic plan are sound, Sandell remains concerned about its execution. Sandell believes the Proposals provide additional flexibility should the Company's complex turnaround, involving significant investment over many years across several divisions globally, fail to materialise in the timeframe outlined.

Commenting on his continuing dialogue with the Company, Tom Sandell, Chief Executive Officer of Sandell Asset Management, said:

"We believe shareholders strongly support our ideas, and have been encouraged by their reaction since our engagement with the Company became public. The Board's statement that it remains open to shareholder feedback is encouraging and will allow for constructive and open engagement about ways to improve the Company's performance and deliver value to shareholders."

The Sandell Plan includes the following proposals:

1. Spin-off FirstGroup US: Spin-off FirstGroup US to FirstGroup shareholders. Immediately prior to spin-off, raise new debt at FirstGroup US, with proceeds used to repay the Company's existing debt;
2. Sell Greyhound: Sell Greyhound, a relatively small non-core asset following the spin-off of FirstGroup US, to focus management attention on the Company's UK businesses; and
3. Strengthen New FirstGroup's balance sheet: Strengthen New FirstGroup's balance sheet through proceeds from Steps 1 and 2 to better prepare the Company for the upcoming UK rail franchise bids and to invest in the operational turnaround of the UK Bus business.

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^[1] Comprising First Student and First Transit

^[2] Comprising the remaining UK bus and rail businesses following the spin-off of FirstGroup US and the sale of Greyhound

Important Notices

This announcement is not intended to and does not constitute or form any part of an offer to sell or subscribe for or an invitation to purchase or subscribe for any securities or the solicitation of an offer to purchase or subscribe for any securities. In particular this announcement is not a "financial promotion" for purposes of the Financial Services and Markets Act 2000, nor a prospectus. Nothing in this announcement constitutes legal, tax, accounting, regulatory, investment or other advice of any kind to any person in any jurisdiction.

Certain statements in this announcement, including those regarding the possible or assumed future performance of the Company, its subsidiaries, investments or its industry or other trend projections may constitute forward-looking statements. By their nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or developments to materially differ from those expressed or implied by those forward-looking statements. Accordingly, no assurance is given that such forward-looking statements will prove to have been correct and any such statements speak only as at the date of this announcement and none of Sandell nor any of their respective affiliates or their respective officers, directors, employees, agents or professional advisers (all such persons together being "Relevant Persons") undertakes any obligation to update these forward-looking statements after the date of this announcement, save to the extent required by applicable law. In particular, but without limitation, no representation or warranty is given by any of the Relevant Persons as to the achievability or reasonableness of, and no reliance should be placed on, any assumptions, targets, forecasts, projections or estimates with regard to anticipated future performance of the Company, its subsidiaries, investments or its industry.

Certain information contained in this announcement has been obtained from third-party sources and whilst each of the Relevant Persons has no reason to believe that such information is false or misleading, no independent verification as to the accuracy or completeness of such third-party information has been undertaken and accordingly no representation or warranty is made by any of the Relevant Persons as to the accuracy or completeness of any such information. The information and opinions contained in this announcement do not purport to be comprehensive, are provided as at the date of this announcement and are subject to change without notice. None of the Relevant Persons undertakes any obligation to update the information and opinions contained in this announcement after the date of this announcement, save to the extent required by applicable law. However, nothing in these notices shall constitute an exclusion of liability for, or exclude a remedy in respect of, fraudulent misrepresentation.

The release, publication or distribution of this announcement in jurisdictions other than the United Kingdom may be restricted by the securities and other applicable laws of those jurisdictions and therefore persons into whose possession this presentation comes should inform themselves of and observe any such restrictions. Failure to comply with any such restrictions may constitute a violation of the securities and other applicable laws of any such jurisdiction, for which none of the Relevant Persons will accept any liability.

Letter to the Board of FirstGroup plc

15 January 2014

The Board of Directors
FirstGroup plc.
50 Eastbourne Terrace
London W2 6LG

c/o Mr. John McFarlane, Chairman

By Email and By Hand

Dear Sirs,

Re: Proposals to Re-focus FirstGroup plc

We write today to follow up on our previous letter dated 11 December 2013, where we outlined certain steps (the "Sandell Plan" or the "Proposals") which we believe will better position FirstGroup (the "Company") operationally and financially for the long term and will also unlock shareholder value.

Since the public disclosure of the Sandell Plan, we are disappointed that the Company has chosen to characterise the Proposals as containing "structurally flaws" and "inaccuracies". Following our detailed discussions with the Company, we have considered the issues raised by the Company, which, in our view, were relatively minor, and have updated our analysis to address these issues.  In addition, we have taken into account changes in market conditions since our discussions began. We continue to believe that the operational and financial benefits of our Proposals substantially outweigh the potential costs and will maximise shareholder value.

We believe the Company's rejection was premature, without fully appreciating the rationale behind the Proposals. The Sandell Plan is not a replacement for a sound turnaround plan. Instead, Sandell believes its Proposals are best carried out in conjunction with such a plan to improve the plan's chances of success and to provide additional flexibility should a turnaround fail to materialise in the anticipated timeframe. Given the Company's track record of poor execution that forced it into the recent rights issue, its failure to appreciate this last point is particularly disappointing.

Although we believe that the basic tenets behind the Company's strategic plan are sound, we remain concerned about its execution. The Company's current strategic plan is very complex, involving significant investment over multiple years and across multiple divisions globally. Without some necessary change in the Company's current structure, we believe a successful implementation of the strategic plan is far from guaranteed. The Sandell Plan is designed to address what we believe is the key reason behind the Company's consistently poor execution, namely the increased complexity of the business since the acquisition of Laidlaw International Inc.

If the Sandell Plan were to be implemented, both FirstGroup US^[1] and New FirstGroup^[2] would be focused businesses with independent accountable boards, right-sized balance sheets, and motivated management teams that are appropriately incentivised to deliver long-term returns to shareholders. Taking advantage of the favourable market conditions today, we believe this could be achieved without materially foregoing the potential future upside to shareholders. In fact, we believe that FirstGroup US would likely be rewarded with a multiple at a premium multiple to the current FirstGroup, additionally delivering near-term returns to shareholders.

We are encouraged by the Board's statement that it remains open to shareholder feedback, so, in order to assist the Board in better understanding the Proposals, we have prepared a White Paper, which is attached to this letter. We hope this White Paper will provide a clearer picture to both the Company and the Board regarding the operational and financial benefits, as well as the technical feasibility, of the Sandell Plan.

In particular, the White Paper includes detail of why we believe the Sandell Plan would provide the following operational and financial benefits to the Company:

Operational Benefits

• Stronger and clearer focus
• Better incentives for management
• Improved accountability to shareholders
• Improved transparency
• Additional cash for reinvestment

Financial Benefits

• Improved valuation of FirstGroup US
• Lower overall cost of capital
• Reduced debt and lower interest payments

We believe there is strong shareholder support for our ideas and this belief has been reinforced since our engagement with the Company became public. We hope that the Board will reconsider its rejection of the Sandell Plan and recognise that the Proposals can work in conjunction with a sound turnaround plan. We take our stewardship responsibilities very seriously and we hope it is clear from the White Paper that we have conducted a very detailed analysis as to the feasibility and the potential benefits of the Proposals. We firmly believe that the Company should take advantage of the current favourable market conditions to maximise the chance of success at both FirstGroup US and New FirstGroup in the long-term. The favourable market conditions will not continue indefinitely, and the options available to the Company now, may not be available in the future.

As an active owner of the Company, we believe in open and transparent dialogue with other shareholders. Consistent with best practices, we intend to publish the White Paper to enable a broad discussion with other shareholders and stakeholders in the Company. We are eager to have a direct dialogue with the new Chairman and invite the Board to re-engage with us to discuss our Proposals. We look forward to hearing from you.

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^[1] Comprising First Student and First Transit

^[2] Comprising the remaining UK bus and rail businesses following the spin-off of FirstGroup US and the sale of Greyhound

Yours sincerely,

Thomas E. Sandell
Chief Executive Officer
Sandell Asset Management Corp.
Phone: +1-212-603-5700

For further information contact:

Sandell Asset Management Corp. (London)
Felix Lo
+44(0)20-7881-8300

Bell Pottinger (Financial public relations)
Nick Lambert
Victoria Geoghegan
+44(0)20-7861-3232

SOURCE Sandell Asset Management Corp.