First Group’s £1.9bn ($3.6bn) purchase of Laidlaw International will make them the largest player in the Yellow School bus market. At £16.56 ($35.25), First paid an 11% premium for Laidlaw’s shares based on their New York Stock Exchange closing price of £16.30 ($31.22).

First Student was the number two in the market with 20,000 buses that carry almost 2m students every day. Laidlaw Education Services, the market leader has a 27% market share. The combined market share of the two companies will be close to 50%, something that will trigger competition issues. The third largest player is Durham School Services, owned by the National Express Group.

Addressing competition issues is likely be easier than the ongoing battle that First’s management will face with the unions representing their own and now Laidlaw’s workers. First have been at loggerheads with the recruitment activities of the Service Employees International Union (SEIU) and the International Brotherhood of Teamsters (IBT) for some time. As part of the IBT’s campaign last year they formed a coalition with the UK Trade Union Council Pension Fund, to sponsor a resolution at First’s Annual General Meeting in 2006 (resoundingly defeated). First Group say they are not anti-union, but want any industrial action by employees who are union members to be decided by secret ballot. The root of the problems between First, the IBT and SEIU boils down to pay. First pay new drivers $10 per hour, Laidlaw $11 and Durham $13. By way of comparison, most casual bus drivers in the UK get at least £7.50 per hour ($14.60). Low pay, casual employment and the complexity of qualifying as a school bus driver have led to serious driver shortages affecting all companies.

While the US market is huge, it is also very competitive. The economics of running buses that operate for a few hours each school day on fixed price contracts makes it difficult for owners to spend large sums on maintenance and to invest in new vehicles. In New York, government officials, environmental and health campaigners are trying to force older diesel vehicles off the road, but operators say they can’t afford to upgrade their fleets unless they are paid more.

While better buses and more sophisticated services are what school districts say they want, when it comes to making decisions the winner is almost always the lowest bidder. On the same day the deal was announced, First, Laidlaw and Durham were all pitching for a contract with the Hamilton County Board of Education in Tennessee. According to The Chattanoogan, Laidlaw bid $8.9m, Durham $9.2m and First $9.8m (First are the incumbent). As an added incentive, Durham was offering to fit all school buses with advanced GPS tracking systems and to provide three large air-conditioned passenger buses, eliminating the need for the county to hire additional vehicles for field trips and sports events.

While the board’s decision hasn’t yet been announced, it will probably go to Laidlaw, a small indication of just how challenging this deal is going to be for First.
www.durhamschoolservices.com
www.firstgroup.com
www.firststudentinc.com
www.laidlaw.com
www.laidlawschoolbus.com