Deal focus: Allegro gets GSR back on track

For Serco, the decision to divest Great Southern Rail (GSR) was largely economic: the Australian business recorded revenue of GBP58 million ($75.4 million) in 2014 and an operating loss of GBP3 million. There were also exceptional costs amounting to GBP74 million. A strategic review concluded that "given GSR's historical lack of profitability, as well as limited synergies with the rest of Serco's transport portfolio," there was no alignment with the parent's future strategy.

The UK-based company launched a sale process but this drew minimal interest. Not only would prospective buyers have to deal with the complexities of carving out GSR into a standalone entity, there were also question marks over whether it could survive. Although the business operates some of Australia's most iconic rail services, it relied heavily on subsidies; the 2014-2015 federal budget confirmed they would be withdrawn.

Turnaround specialist Allegro Funds acquired GSR in May 2015. Three months later, the company announced that A$9 million ($6.7 million) in government money that went towards fare concessions would end the following year. Allegro wanted to offset this impending drop off by switching from a transportation-oriented model to one underpinned by luxury experiential tourism.

"The more time we spent with the CEO, Chris Tallent, the more we became convinced that it was the obvious thing to do," says Adrian Loader, founding partner and managing director at the firm. "But it was unknown what the consequences of transforming the business would be in terms of customer demand and profitability."

The effort appears to have paid off, with Allegro agreeing to sell a majority stake in GSR to Quadrant Private Equity at an enterprise valuation of A$100-200 million. The GP is expected to generate an IRR in excess of 100% on its investment - the first exit from its second fund, which closed at A$180 million in June of 2015 - and retain a meaningful minority stake in the business.

GSR operates three services: the Ghan between Adelaide and Darwin; the Indian Pacific between Sydney and Perth; and the Overland between Melbourne and Adelaide. Its multi-day trips include stops along the way to take in local attractions. Allegro invested in improving the customer experience, and also reduced the number of journeys and lengthened the trains, delivering economies of scale and boosting yield per journey. Resources were then plowed into marketing, the success of which is apparent in GSR's services being almost fully booked for the current calendar year and 40% sold for 2017.

"Chris has done a remarkable job of focusing on the quality and detail, emphasizing the customer experience," Loader says. "He coined the phrase, ‘dirty boots and fine wines,' because you get off the train and experience the outback and then get back on board and enjoy an amazing service."

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• Topics
• Australasia
• Consumer
• Infrastructure
• Buyouts
• Trade sale
• Buyout
• GPs
• Australia
• Logistics
• Allegro Funds
• Quadrant Private Equity