Starting on slide two, we were delighted to announce this morning that we have signed an agreement to acquire RATP London. This is a significant acquisition for us, which will see us enter the London market at scale, further diversify our portfolio, and materially grow our earnings in the medium term. As we've highlighted on the slide, the enterprise value is GBP 90 million, which is underpinned by around GBP 100 million of physical assets. Ryan will go into more detail on this in his section. We expect the business to be broadly earnings-neutral in financial year 2026 and operating cash flow positive from financial year 2027. There's a strong strategic rationale for the acquisition of RATP London, a well-established business with considerable market share and a strong operational footprint.
These include further growth and diversification of our operations and earnings, entering an attractive market at an opportune time, and further growth opportunities through a number of potential synergies. The acquisition also provides strong credentials for future U.K. regional franchise bids. RATP London's relatively new management team are also expected to join FirstGroup to continue the delivery of their proven turnaround plan. Turning now to slide three with an overview of the business. RATP London is one of the larger operators in London with a circa 20% market share. There are around 3,700 employees across the business, of whom just over 80% are drivers. They operate around 1,000 buses out of a well-established depot network in West and Central London. These include six leased depots and four owned. You can see the locations on the right-hand side of this slide.
The majority of the senior leadership team have joined over the last few years and have developed and implemented a turnaround plan that includes enhanced contract bidding and improved operational and cost performance. They've made good progress to date with disciplined rebidding for routes, including the early termination of loss-making routes at contract review dates, and they have been achieving top positions in recent Transport for London's Bus Operator League Tables. One of the attractions of the business for us is their progress and capabilities in electrification. They've been an early mover, and at the end of March this year, they stood at circa 30% EV fleet penetration compared to an average of 16% for the London market as a whole. RATP London also reported revenues of GBP 271 million in 2023.
Moving on to slide four, where we have set out some of the key highlights of the London bus market. We're pleased to be entering the London market and at a time where we see great opportunities ahead and an established, resilient market with a positive growth outlook. I won't go into detail on each point, but as you can see from the numbers we've given on the market, the London bus market is considerable in terms of revenues, fleet, and modal share. This is underpinned by a strong funding commitment from Transport for London. Looking at demand, we have flagged some of the growth drivers for volumes over the next few years. These include continued population and tourist volume growth, bus priority measures to enhance services, and to drive modal shift. TfL also has an ambitious decarbonization agenda, which should further support volumes.
I will now hand over to Ryan.
Great. Thanks, Graham, and good morning, everyone. I'll be talking through the financials for the acquisition. That has been agreed at an enterprise value of GBP 90 million, and this will be financed with GBP 45 million of our cash and the balance on the assumption of RATP London's asset-backed vehicle finance leases of roughly GBP 45 million. As Graham noted, what really has impressed us about the business, over and above the strong operating model, is that the profit recovery is well underway, driven by the turnaround plan that includes enhanced bid discipline with an incrementally improving contract base, combined with much improved operational performance and cost focus.
In terms of near-term financial performance, assuming the transaction closes before our March 2025 year-end, the contribution from the business will be broadly earnings-neutral in full year 2025 and full- year 2026, and I'll discuss this in more detail on the next slide.
The business has gone through a period of losses in recent years, given the material inflation impact, mostly in wages. That has not been fully recovered through the contractual inflation protection mechanisms. That being said, the profit recovery is well underway, driven by recent contract awards and cost-based remediation, and we anticipate revenues will grow to roughly GBP 300- GBP 350 million over the next five years. It is anticipated that margins should also improve to roughly 6%-7% over the coming years as the old contracts are replaced, with these margins being in line with historical London levels. The contract portfolio currently consists of circa 40% that have positive earnings contribution, with the balance currently loss-making, given that they were entered into before the material cost increases, driven by the reaction and response to the COVID pandemic.
As a result, the Group will recognize an onerous contract provision of circa GBP 40-50 million that will unwind in line with the respective contracts, meaning there won't be a material negative impact to the P&L going forward. Given the losses that are being incurred that need to be funded, overall, we anticipate an operating cash outflow of circa GBP 30 million after bus operating lease payments and CapEx in the first two years of ownership, following which the business is expected to be operating cash positive from full- year 2027 onwards, assuming continued use of operating leases to finance the buses that has been the recent norm. The business has 10 depots, of which four are owned, with an existing use value of circa GBP 50 million. There are a further GBP 50 million in physical assets, which provide a decent underpin to the acquisition value.
The acquisition is expected to complete in the first calendar half of 2025, with this subject to the usual completion requirements combined with French government approval. Turning to slide seven as we take a closer look at the contract portfolio. As I mentioned on the previous slide, we anticipate the business revenues growing to circa GBP 300-GBP 350 million per year over the coming years, as the newer contracts reflect the more current cost base and the shift to the higher overall cost of electrification on the newer fleet. At the point of acquisition, we expect circa 40% of the contracts to be profitable, with 60% having an onerous contract provision. As you can see on the top chart on the slide, the onerous contracts reduce steadily over the coming years and are replaced by new contracts.
As a result, only 22% of revenues for full year 2026 is in the process of being bid for. The average maturity of the contract base is currently 3.3 years, and this is slightly shorter than normal, given that a number of contracts were re-evaluated at the midpoint as a result of the structural shift in the cost base that had not been expected. These midpoint reviews of contracts have a shorter time period as a result, meaning more will be up for renewal in a few years, as is the case with many operators. The evolution of the contract base, combined with the operational progress that has been demonstrated to date, provides us with confidence that the business will get to the more normal margins expected by London operators in the near term, and finally, guidance for full year 2025 and full year 2026.
We anticipate that the acquisition will be adjusted earnings-neutral for full year 2025 and full year 2026 before being a more meaningful contribution from full year 2027 onwards, as the profitability grows to the more normal 6%-7% operating margin. The business will, however, contribute positively to bus-adjusted operating profit in full year 2026, albeit at a lower margin given the onerous contracts. We expect to incur circa GBP 6 million in interest expense. This includes both the interest on the acquisition net debt, but also from the IFRS 16 interest on existing bus operating leases. The Capex should be negligible impact on full year 2025.
However, bus Capex is now expected to be GBP 125 million in full year 2026, up from the GBP 100 million that we guided earlier in the year, with this mostly being spent on electrification in our regional bus business and on electrification infrastructure in London.
The assumption for London is that the electric buses being acquired will initially continue to be financed under operating leases. However, given our wider experience in bus electrification, we will critically review this given the battery pricing and potential value given up in a lease model. We will update the market in due course if there is a shift in approach to vehicle financing. On this basis, we anticipate ending full year 2026 with an adjusted net debt position of circa GBP 130 million. That is roughly 0.5 x covered Adjusted EBITDA to net debt, leaving the Group with plenty of balance sheet capacity to continue being opportunistic in the market for further inorganic growth opportunities.
As a reminder on the framework and policy for shareholder returns, the current GBP 50 million buyback program will continue, and we remain committed to our progressive dividend policy that's currently around 3x Adjusted EPS.
I'm going to hand over to Graham for some closing remarks.
Thank you, Ryan. I will now briefly conclude before we take your questions from the call. Moving to slide 10. This is a significant acquisition for the Group that will transform First Bus and allow us to further diversify and materially grow our earnings in the medium term. It will allow us to enter the London market, which, as I set out earlier, is at a key inflection point with a positive growth outlook. RATP London is a resilient business with a strong market position and depot footprint, and we look forward to working with their highly experienced and capable management team to continue the delivery of the proven turnaround plan. Looking further ahead as the regional bus market evolves, the experience we gain in the London market will further bolster our credentials when participating in future franchising opportunities in regional bus.
Finally, as we set our half-year results in November, the Group is well positioned as our markets and portfolio continue to evolve. Our strategic framework is focused on delivering operational excellence every day, driving modal shift, leading in environmental and social sustainability, and diversifying and growing our portfolio. We have also maintained our balance sheet capacity and continue to evaluate a pipeline of growth opportunities in both bus and rail. We remain committed to our disciplined capital allocation policy and will return any surplus cash to our shareholders. Thank you for your time this morning, and we will now open for questions. To ask a question, please raise your hand, and we will then ask you to unmute your microphone. Thank you for your time.
Rory.
Question from Rory.
Yes. Good morning. A few questions on the earnings potential of the business. Is there much further work to be done to get the business up to 6%-7% margins, or will it come quite naturally as contracts are rebid? How would you describe the competitive environment in London when rebidding? And could I just confirm the synergies are additive to the 6%-7% margins? And are there any comments you can make on the potential size of the synergies? Thank you.
Okay, Ryan. Do you want to take that?
It's all nicely financial, Rory. Thank you very much. I think the EPS potential, we've guided the revenue for the business should grow from up to about GBP 300- GBP 350 million over the coming years. And that's really just a natural impact of the change in the cost base, which has impacted all London operators as well as a consequence of the electrification. And the evolution of the onerous contract provision on that sort of 60% of contracts, as you saw in the earlier chart, will naturally contribute to earnings growing or operating profits growing at least by sort of that 100 basis points per year is our expectation. And we've given you a guide on what the interest impact is, as well as roughly around about GBP 6 million. So it translates to being a really decent positive EPS trajectory for the business over the coming years.
To your question on sort of the competitive landscape from a bidding perspective, I mean, London is a fairly competitive market to be operating in, but I think location of depots is key to be successful. And the team, from the diligence that we've done, have been as successful as they should be relative to their strong positions. And so we kind of expect that to kind of broadly continue. They've won some really big contracts recently. They've recently won the biggest contract in London, which is a great coup for them, which is obviously a decent underpin as well. And then on the synergies, we've guided on a number of potential synergy opportunities, and they're sort of ranging from procurement, advertising, the energy play that I discussed briefly in the presentation.
But we've also got our business Ensignbus, which takes a large number of London buses and converts those to recycle and back into the market, which will be a positive play for us as well. And those synergies are expected to be additive to the sort of margin thresholds of 6%-7%, which we believe are sort of more normal margins for London bidding. And then I think there's a point that sort of financially led. The business has obviously been historically tax loss-making, so we will have the benefit of that on a go-forward basis. So whilst EPS will have the tax impact against it, we wouldn't expect to be cash tax paying for a number of years given the historical losses. And I think that the business will be working through over the coming years.
And I think just to reinforce on renewals, they have been competitive and winning the majority of what they've been bidding for over recent times. And as an overall business, we will remain very disciplined on margin. If you can go back a period of time, two, three years, the aim of the business was to, if the bus business was to get to a 10% operating margin on roughly GBP 800 million of revenue, we've now managed to grow the business beyond a billion of run rate revenue. And this takes us up another circa GBP 300 million as well. So this will be about absolute margin progress of the bus business, but we will maintain the disciplined approach we've taken on regional bus will be applied to RATP London as well.
Gerald.
Hi, Gerald.
Oh, a question from me, if I can. Did I hear you right and say that you said that there's a bulge in contract renewals as a result of exercising the rate clauses? And if so, when does that hit? And secondly, are you able to give a figure for the contract renewal rate over the past two years as the business has been going through this attempt to reprice to mitigate the cost inflation?
Yeah. I mean, on the contract renewal bulge, I think you can probably see it quite neatly on that chart that I've shown on the percentage of revenues. You can see sort of the evolution of the not yet contracted bars in terms of their step down. It's probably about sort of two years. I think you'd probably describe it as when there's small bulges. But remember, the average on a London contract would be roughly about seven years, with them having a contract portfolio average of 3.3 years. When you say bulge, I mean, it is a really, really small bulge. It's not something that sort of troubles us at all, Gerald.
In terms of sort of bidding margins, I don't think it'd be right for us to be disclosing that on the call, but just to say that it's back to kind of more normalized levels that you'd expect in London.
Sorry, I was just wondering what percentage of contracts were retained rather than what margins you were doing it at?
No, sorry, high proportion is generally retained. They've got a strong operating platform, and as Graham noted in his section on the presentation, the quality of the business is incredibly high as well. So they score very well in that regard. And so the retention rate is high, and they've been quite successful.
Alex Paterson.
Morning, Alex.
Yeah, morning, everybody. Can I ask? In fact, a lot of what I was going to ask has been asked, but if I just try and sort of clarify a few things. You mentioned that the majority of contracts that have been rebid recently have been won. I just wondered if there were any reasons contracts had not been retained? Was that intentional, or was it just somebody bid more competitively? Ryan, you mentioned synergies and a wide range of sources. I just wondered if you can give any indication of magnitude of those, and specifically, I was thinking about the Hitachi JV, given the value of the battery in a vehicle, whether that actually would give you a very good competitive advantage in London, and then finally, I know a number of other countries and cities have copied the London model.
Would you have any ambitions to bid internationally in any of those?
Ryan, do you want to take the first two, and then I'll come in?
Yeah. And I think in terms of why they lost the bids, we don't currently fully own the business. And so the amount of diligence we've been able to do on that specific point has been a little bit more limited because obviously we had to take a view. But I suspect when we do take the view, it's going to be just simply down to natural competitiveness of London. I think the retention rates in London operators is a pretty high proportion, actually, as a general rule, and it's primarily dictated about almost where depot location is, which gives you a bit of a more competitive advantage. And so it's going to come down to pretty marginal changes and deltas between winning and losing, I suspect. But it is a competitive market, but the market pricing seems to be sensible based on current market fundamentals.
In terms of synergies, we intentionally did not quantify those in this announcement. That'll be something that we'll bring back to the market in due course. You kind of highlighted the Hitachi joint venture. I think what sort of really did surprise me with London operators is the lease model and how those sort of seem to be designed with a large number of lending institutions, particularly around that sort of battery change during some point during the lease term. It seems like an awfully large amount of value gets given up on that battery change with the lease model. And so we need to spend some time looking at basically how this business is going to be capital funded and taken into consideration for the opportunities that we see through, for example, like the Hitachi joint venture on battery funding.
Yeah. And on the international aspect, I mean, clearly, a reference point in London is attractive on a number of levels for us. And again, the diversification and growth of our bus business was fundamentally about de-risking our regional bus business anyway. But internationally, our view still holds that if we're going to look to take a position, we're more likely to go in with a platform of some kind and then bid from there rather than just bidding cold into individual contracts, which we don't feel are that attractive in their own right. So at this stage, we have no plans to do that. We said we would look to exhaust growth opportunities in the UK. And I think if you look over a two or three-year period, we will have taken a business from slightly under GBP 800 million of revenues to close to GBP 1.4 billion.
So I think that's good progress and gives us a strong position in all markets in the U.K. So we will keep a watching brief. If we think there's an attractive opportunity, we might look at it. But by and large, we're more minded that if we're going to take a position, we'll do it through having a platform that exists and then looking to build from there.
Thank you.
James Lowen.
Morning, gents. Well done on this. It looks very interesting. Just three questions from me if I can. Maybe you could just give us a bit of background to the bidding process. Was it a competitive auction? Was a number of people locked out because they've already got positions or they've got balance sheet problems? So that's the first question. Second question, just on the tax loss situation. Maybe you could just quantify how much cash losses there are so we can understand the value dynamic there. And then thirdly, obviously, you've been doing quite a lot with Open Access and then this. Do you think you're going to have a foot in the door now in terms of further acquisitions, or do you think because this is quite ring-fenced, you can keep moving forward and carry on doing things as others sort of flounder around? Thanks very much.
Okay. On the process, I mean, it was a competitive process. I don't really want to go into too much detail, but we decided at an early stage we felt we were ready for an acquisition of this scale. We felt it was a really good fit with our business on a number of levels. So we put a strong team in place, and we were very proactive through the whole process. So we feel we've come out the other end of it with a good business at a fair price. We think that's a good combination. Ryan, do you want to take the second one?
Yeah. On the tax losses, I mean, obviously, you can't buy losses to offset against other group losses, sorry, group profits for a period of about five years or so. So these tax losses will provide a decent shield for the coming years in this RATP business that we've bought. And then after that, we'll be available for offset. When you sort of combine that with the accelerated capital allowances we've been able to achieve on the buses and the wider regional bus, it becomes a bit more of an interesting play for us over the next sort of five years as we sort of manage cash taxes to limit the amount that we need to be paying in that regard. So it's a useful addition.
It wasn't something that was paid for because clearly, we've got to make the profits to benefit for it, but it's a useful addition to the portfolio that's uncounted.
Yeah. And on the kind of strategic position, James, I mean, we laid out a year, 15 months ago that we would really push to diversify our earnings. If you go back two or three years, we were largely dependent on the train operating companies. And we felt we were building up a strong position in Open Access. And we had a bus division that, okay, had to improve its margins, but we felt had a really strong team with strong capability to grow. So as the train operating company, National Rail Contracts, became clearer as to what was going to happen, we made an internal call to push much harder on both Open Access and growing our bus business. And we laid out five or six opportunities as a business that we felt were potentially there to get done.
With the usual rule of thumb, we felt if we could do 60%-80% of that, we'd be happy. We've actually done better than that. We've virtually been able to deliver everything that we put down as part of our strategic plan 12 months ago. I think it still leaves us. I think what we've done in Open Access is a strong foothold now. We've got more to do. It was a good announcement last week, well received by the government. We got support from the Prime Minister for Open Access, which was great to get. We had some private time with them to discuss the market, how it might evolve, and the potential for longer-term U.K. manufacturing train jobs, which went down well.
So, we think we've built up a position now in Open Access that we can get the bulk of the approvals through, that we were in a strong position three to five years down the line, and that basically operating on all the main lines in the U.K. And then on bus, clearly, we've been able to now materially scale that business, which is what our aspiration was internally. And now we've got to kind of execute again. But we've done that over the last few years in terms of the existing bus business. And we're confident with grit, determination that we will do it again. And we think we've got a team that's more than capable of doing that, which is great. And then obviously, on what comes next, we're still only leveraged up to 0.5x . We're naturally conservative in how we look at this.
And we think that's stood us in good stead over the last few years. And we don't intend to change that position. But if we see something that we think we can add value and it's a very good fit with strategy on the business as it stands today, we will look at it. But as I said before, we would only do this in small incremental steps. And okay, this is maybe slightly larger than maybe most were expecting, but it's probably only using up a half to a third of the potential that we have in the business around growth. And the job now is to deliver the hard operations and the hard financials and ultimately cash flow out of this business. And that's what we intend to do.
Okay. Thank you very much.
Anton.
Thank you. And thanks for your presentation. Two questions, please. First, on labor relations and if you have a CBA in place and when should that renegotiate it, if you can give the color on the current terms of the labor agreement. And second question on the market share. So 12% market share, are you able to give any color on how has that developed historically? Was it higher or lower in the past? And do you have any specific ambitions about the market share moving forward? Thank you.
Yeah. On the labor relations, I think that we can't speak specifically from the previous owner. My understanding is that they're fairly good. I think they're going to be going into their contract negotiations over the next 12-month period. We've got strong relations with all of our regional bus operations and really expect to kind of continue to play that into this acquisition as well.
Yeah, and I think as far as we're concerned, that's business as usual. That's what we do in our bus division, and we'll continue to try and do it effectively to the benefit of both parties. In terms of market share, I think there is the potential for this business to certainly grow its market share beyond 12%, but we would only do that if we felt it was economic to do so. But when you look at the depot footprint and the potential opportunity for this business, you could easily see it being closer to 15% over a strategic cycle if we were able to bid effectively and win. So there is potential, I think, to grow an element of market share, but we will only do that if we feel it's economic to do so. Okay, that seems to be all questions, so look, thank you very much.
I know it's short notice this morning to attend the call. Hopefully, you found it useful. We think it's a good acquisition for the business at a fair price and gives us lots of opportunity to grow earnings over the medium term, and we think it's going to provide, as Ryan said, around synergies, but also in terms of experience around franchise bidding in the UK as that potentially begins to open up over the next three to five years. We think that will be very supportive, so we think all around, it's a good step forward for the group, and we look forward to putting numbers on the page for you, so thanks very much for your time today.