JP Morgan firm emerges as frontrunner in multibillion pound rail deal

A company owned by the Wall Street banking giant JP Morgan has emerged as the leading contender in the £4 billion sale of Eversholt, one of Britain’s most profitable train leasing firms. Eversholt owns thousands of train carriages and locomotives, leasing these assets to operators at significant costs to taxpayers.

The train leasing company’s owner, CK Infrastructure, hired advisers from Rothschild earlier this year to explore potential options under the codename “Project Falcon”. Sources indicate that Beacon Rail, a smaller competitor also owned by JP Morgan, is among the top bidders aiming to acquire Eversholt.

CK Infrastructure, the investment arm of Hong Kong billionaire Li Ka-shing, has run Eversholt since acquiring it in 2015 for a reported £2.5 billion. The company is now looking to capitalise on its investment despite looming questions about whether such leasing firms offer good value for both passengers and taxpayers.

The business model of train leasing firms has come under scrutiny, with unions criticising the substantial public funds allocated to these companies. Rothschild’s internal marketing document highlights Eversholt’s guaranteed revenue streams, emphasising that payments are not tied to passenger numbers or train usage, ensuring steady returns for investors.

Critics argue this arrangement leaves the state financially exposed, obliging it to cover revenue shortfalls during periods of reduced passenger demand. As a by-product of the government’s decision to end rail franchising during the pandemic, the financial interests of leasing firms remain robust while taxpayer burdens rise.

Despite these criticisms, the UK government has confirmed it will not interfere in the sale. Transport Minister Simon Lightwood has reiterated the importance of private train leasing companies, stating there are no plans to change existing leasing structures.

Regulatory concerns, however, may pose challenges to the ongoing sales process. The Office of Rail and Road (ORR) has launched a wide-reaching review into the activities of train leasing companies, focusing on whether these firms operate in the best interest of passengers. With train leasing costs forming a significant share of overall operator expenses, the findings of this review could impact Eversholt’s valuation.

As bidders like Beacon Rail compete for Eversholt, some industry voices doubt CK Infrastructure will secure its desired £4 billion price tag. A substantial portion of Eversholt’s fleet is used by Southeastern. If this operator puts its leasing arrangements out to tender, new competitors may disrupt Eversholt’s dominance in the market.

Originally part of British Rail, Eversholt was launched into private ownership in 1995 and later acquired by Midland Bank in 1997 for just over £700 million. Over the years, it has changed ownership multiple times, demonstrating the ongoing value investors see in its stable returns despite criticisms from unions and passengers alike.