My question is why is profit of less than 0.3% seen as adequate for Amex, but 3% is seen as barely enough for a ToC?
The simple answer is Risk. If you were assured a nice steady return with little likelihood of loosing your original capital, then you should expect a low rate of return. 0.3% suggests a really solid investment.
On the other hand if you were likely to get nothing at all because the likelihood is that the company will make nothing at all or even loose your capital because the company goes bust, then you would expect a very high return to make it worth your while investing in the shares.
Earlier post talked about shareholders. When we speak of
TOCs▸ they are separate companies (usually) wholly owned by the holding company. So there are shareholders - just they are corporate shareholders.
If we look at the East Coast debacle - we see that two previous companies have handed in the keys (not just exercised a break clause) and another one is about to do so. The fact that the current Government seems likely to let Stagecoach off lightly is something that had a risk to it as well as we all know that politicians are unpredictable.
The result therefore of
DfT» 's push to get the best deal and, on bidding,
appear to transfer huge risk to the TOC means that bidders will factor in for higher returns to cover the risk. They say they have transferred risk. In some (but not all) cases they have created that risk in order transfer it, which is madness as it just creates excess cost!
Government is seen as a low risk borrower so they can borrow at much lower interest rates. However when they privatise they transfer risk so must pay more. This is why some (right and left alike) are asking if privatisation is worth it.
What about the cost of bidding for a franchise? Does that count as 'capital'?
Nope, that's Opex.
I disagree. It is money put up front in the hope of getting a return. If the bidder looses they get nothing! In my judgement therefore it can be considered capital.
