UK seizes control of Go-Ahead's Southeastern rail franchise

By Kate Holton and Sarah Young

LONDON, Sept 28 (Reuters) – Britain said it would seize control of Go-Ahead Group’s Southeastern rail contract after the transport company admitted financial errors and repaid 25 million pounds ($34 million) to the government, the latest failure of the UK’s franchise system.

Go-Ahead postponed its annual results that were due on Thursday, announced the immediate departure of its finance director, Elodie Brian, and apologised for its conduct on the London & South Eastern Railway contract (LSER).

The Department for Transport (DfT) said the government’s operator of last resort would take over the running of the service from Oct.17, criticising the company for its conduct and threatening further action, including fines.

Shares in Go-Ahead, which also operates bus services and the Govia Thameslink Railway service, traded down 11% to 947 pence on the news.

The scandal is the latest in a long line of problems with Britain’s franchising model that was used to run the railways after privatisation in the mid-1990s.This year, it announced a shake-up of the system after multiple failures.

The DfT said it was undertaking further investigations into the LSER contract.

“There is clear, compelling and serious evidence that LSER have breached the trust that is absolutely fundamental to the success of our railways,” Transport Minister Grant Shapps said in a statement on Tuesday.

Go-Ahead said its financial results for the 12 months to July, including the expected provisions related to the franchise but excluding any further financial penalties, remained in line with its expectations.No date has been set for their release.

Liberum analyst Gerald Khoo said that Go-Ahead’s bus operations accounted for the bulk of its value.

“However, there is an unquantified one-off financial penalty exposure (likely to be manageable), and a probable negative impact on the group´s ability to win future rail contracts, both in the UK and overseas,” he said.

LSER connects London with busy commuter areas in Kent and East Sussex in southeast England and is run by Govia, a joint venture majority owned by Go-Ahead alongside France-based partner Keolis.The pair continue to run their other rail contract, Thameslink.

Public transport companies have been hit financially as fewer people travelled during coronavirus lockdowns, and analysts have recently argued in favour of consolidation. Go-Ahead’s UK competitors FirstGroup and Stagecoach are in merger talks.

Go-Ahead Chairman Clare Hollingsworth said the group was working with DfT towards a settlement of the matter.The company named Gordon Boyd as interim chief financial officer. Current Chief Executive David Brown is due to retire in November and be replaced by Christian Schreyer. ($1 = 0.7311 pounds) (Reporting by Kate Holton; editing by Sarah Young, Robert Birsel)