TRAIN and bus operator Stagecoach today confirmed that it has approached rival National Express over a possible merger.

TRAIN and bus operator Stagecoach today confirmed that it has approached rival National Express over a possible merger.

Stagecoach was previously lined up to buy the UK rail and bus businesses of National Express (NX) from a consortium of the Spanish Cosmen family and buy-out firm CVC which launched a takeover bid for NX in July.

But on Friday - the deadline under City rules for it to make a firm offer or walk away - the consortium announced that it would not be going ahead.

Although Stagecoach had previously ruled itself out of making a full-scale bid of its own for NX - which includes the National Express East Anglia rail franchise - there was immediate speculation that the company might come back with a proposal of its own.

And today Stagecoach confirmed that it had submitted a letter to NX outlining a merger deal which would see NX shareholders own 40% of the enlarged group, estimated to be worth �1.7billion.

This would effectively value NX at around �680million - well short of the �765million indicative offer from the consortium.

Stagecoach claimed that it had been invited by the NX board to make the move, although the public stance of NX following the consortium's withdrawal last week was that it planned to pursue and independent future, including equity fundraising to reduce its �1billion debt burden.

And NX appeared to give the Stagecoach approach only a lukewarm reception today, stating that it would consider the proposal “carefully” but adding: “It is now necessary to rapidly conclude this phase of potential corporate activity to avoid further disruption to the business and to allow the group to secure additional equity funding before the end of 2009.”

The support of the board will be vital to any deal as Stagecoach's decision last month not to make a standalone bid means that, under City takeover rules, it is barred for six months from making any offer without a recommendation from the NX board.

The same applies to rival operator FirstGroup was pulled out of a potential bid for NX in July. In any event, NX today denied reports over the weekend that FirstGroup had also make a fresh approach following the consortium's withdrawal.

Although the Cosmen family, the biggest shareholder in NX, has backed the boards proposed fundraising move, the future of the group is still shrouded in uncertainty as a result of a threat by the Government to strip it of the East Anglia rail franchise, and that for south Essex commuter route c2c.

This follows group's decision to walk away from its loss-making East Coast franchise to which it signed up at the peak of the economic boom. The premiums payable to the Government under the deal, combined with the impact of recession on revenues, has left the franchise facing hefty losses which amounted to �20million during the first half of this year alone.

The NX group has now ruled out providing further financial support for the franchise, beyond that to which it is committed under the terms of the franchise. The existing funding is expected to run out by the end of the year, with the franchise then reverting to state control.

The Department for Transport has warned that it could then seize control of the group's other franchises, under “cross default” provisions, but NX says the clauses do not apply as it will have complied with the terms of the East Coast franchise.

However, the continued threat to its remaining rail businesses could hamper its fundraising efforts and so a deal with Stagecoach could have its attractions.