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Nick Sleep

Stagecoach
LSE:SGC
2002-2004
Industry: UK Public Transportation (Bus)
Category: Fat Trim/Debt Buyback

Context
Bus operator in the UK
UK had deregulated/privatized it's public transportation industry, allowing companies to compete for the market
Under CEO Brian Souter, who had started as a bus conductor, was good at doing the simple things right
His entrepreneurial and straight-talking spirit proved capitalism correct - putting more buses during rush hour, undercutting competition, overall making it a better experience
Stagecoach IPOed in 1993 at 20p and under strong management, rose to 2.85 in 1998

Why the Company is Mispriced
Original founding CEO stepped into retirement, leaving a new management in place
New management made a few bad acquisitions.
In particular, bought a debt-funded roll-up, Coach USA, composed of several bus, taxi, charter coach operations, assembled by investment bankers and a LBO fund
Basically, the company bought something worth a fraction of the purchase price and made little economic sense
Furthermore, Coach USA required heavy investment programs (thank you, LBO fund), and was too complicated for the new management to handle

Alternative View
Souter returned from retirement, began cutting away the fat
Stopped investments in the US operations, sold the worst businesses for asset value, repayed the debt, ultimately focused the business on the UK operations
Cash flow is so strong that the banks have allowed the company to even buyback it's public debt (at a sizable discount to face value), even though the bank debt is due before the public debt
At the peak, Stagecoach had a cost of debt of 15% Sleep estimated the company value to be 60p/sh

Comparables
In 1980s, Charlie Munger had bought Coca-Cola shares
Coca-Cola had a wonderful soda business, but was not intelligent with the cash it was producing, purchasing shrimp farms, winerys, film studios, and it's own bottling plants
When you start to cut away the poor businesses, the jewels in the syrup and marketing are revealed, shares of Coca Cola rose 10x fold
The business is more focus on the core fundamentals, i.e. less is more

Result
In 2002, Stagecoach was bought for 14p/sh
In 2003, Nomad sold the shares for 90p/sh
This implies a 700% CAGR
What Sleep also mentions is that selling was a great mistake, as the shares traded for as high as 300/sh over the next few years
Sleep attributes this mistake as having a static view of the company and not updating his view as the company progressed

Notably
Sleep also regrets not buying the public bonds, which had a near 100% probability of being repaid