Railtrack reinvents itself

Network Rail says profits will go back into the business

The UK's ailing railway system has been given its long-awaited fresh start.

Railtrack has concluded the sale of its core railways business for £500m, handing over control to a new state-backed firm called Network Rail.

Railtrack shares

Float price:
380p

Highest point:
1700p

Price when put into administration:
280p

Compensation offered:
250p

Thursday's price:
224

Transport Secretary Alistair Darling stressed the new firm would be "run for the benefit of the whole railway", and promised that Railtrack would be taken out of administration as soon as possible.

The deal's conclusion also means that shares in the remnants of Railtrack have begun trading again.

For Railtrack's long-suffering shareholders, this is the first opportunity to recover part of their investment.

£4bn backstop

Network Rail, a not-for-profit company controlled by train operators, rail unions and passenger groups, has promised it will be "dedicated to the interests of rail users".

Unlike Railtrack, any profits will be ploughed back into the business rather than being split between shareholders as dividends.

And management incentives will be tied to performance targets such as safety and punctuality rather than profits.

The Strategic Rail Authority will provide a further £4bn as a backstop contingency fund to Network Rail.

Rush to sell

Railtrack shares closed at 224p on Thursday, their first day of trading since the group was put into administration last October.

Some shareholders are choosing to sell their stock now rather than wait for the promise of future compensation to be delivered.

In an apparent government U-turn, the shareholders have been promised compensation of 245-255p a share, but the first instalment will not be received until January.

The compensation offer is 30p below the share price when Railtrack was put into administration in October.

And it is just a fraction of the high point of £17 the share once reached.

Discontent lives on

The two deals are subject to approval by Railtrack shareholders at a general meeting expected in July.

But there is already some discontent among minority shareholders.

"We are still very much opposed to the offer and will vote against it at next month's extraordinary general meeting," said Andrew Chalklen, chairman of the Railtrack Private Shareholders Action Group.

But observers say institutional investors are expected to approve the deal, concluding they are lucky to get any cash back at all.

Under the terms of the agreement, the firm has agreed to abandon its plans to sue the government over its decision to pull the plug on Railtrack's funding.

Railtrack said it had decided the cost and length of the litigation would be unlikely to leave shareholders better off.