Darwen reaching for critical mass
Posted on May 15, 2008 by Richard Beddard
Filed Under Companies |
Just to recap. Darwen only floated on the Alternative Investment Market last February, and already it’s suspended while it hashes out a deal to buy Optare, an unlisted bus manufacturer. Unable to trade, investors, enthused by the potential of fuel-efficient low-emission buses, can only speculate (in the cerebral sense), about the future of their company.
Andrew Brian, chief executive, and John Fickling, a non-executive director*1, met me for lunch at the Great Eastern Hotel en-route to Paddington. It’s been a busy week or two for them already, but the end is in sight.
Optare takeover
So, where are they with the takeover? The proposal, says Mr Brian has full board approval, and he believes, shareholder support. The suspension will be lifted when the admission document for the merged company is published. They’re targeting the “back end” of May, so “it’s imminent,” says Mr Brian. And the transaction should be complete by mid June..
Small shareholders, he says, have nothing to fear. The company will continue to list as Darwen Holdings (DHP) and it’s an all-share deal so:
Technically, there is a dilution but that will be reflected in an uplift in the share price by virtue of the increased group and ultimately the market will dictate our value. Suffice it to say as a board of directors in the interests of our shareholders we expect to experience an uplift in our financial performance moving forward. Whether that be in market capitalisation or net profitability or earnings per share. It’s one of the fundamental reasons for us doing the deal.
Optare is a profit making organisation. It’s cash positive, there’s a strong balance sheet and the consolidated effect of that on Darwen will be nothing but positive.
The rationale is consolidation. Should the deal go ahead, Darwen would be the UK’s number three bus manufacturer after Wrightbus and Alexander Dennis, and England’s number one. Mr Brian says the group will achieve critical mass with the Optare range complementing Darwen’s. Optare manufactures mini (little larger than a Ford Transit) and midi buses as well as a lightweight single deck bus (the Versa). Darwen’s range starts with larger single deckers (Esteem) and is strongest in double deckers:
We can now knock on the door of a local authority, a private operator… and they can come to us as a one-stop shop.
Says Mr Brian. Should the deal go through, it’s not about rationalising the ranges:
Quite the opposite. We’re looking to certainly increase capacity… Our plans upon completion of the reversal will be to invest in new infrastructure in terms of facilities and take it from what has traditionally been a body building operation to a higher volume production line that assembles the product.
Turnaround
Darwen is moving away from the traditional vertically integrated model, where the companies did much of the manufacturing, metal processing and coating for example. Instead, it’s concentrating on design and assembly, and by outsourcing the rest it’s:
Sticking to what we know best.
Says Mr Brian.
The value-ad proposition is in the final assembly, commissioning and quality management.
Outsourcing also reduces costs, says Mr Brian, which may be all the more important as raw material prices rise:
A lot of this will be driven out of design related issues, value engineering, outsourcing, low-cost manufacturing… A double deck bus may take up to 1,500 hours to build and sit in a factory for four weeks. We have set a target for our group operations director of a bus built in one week. In less than 500 hours. So the resulting cost saving… I think will drive a huge amount of margin into the business.
Having raised production to five buses a week, Darwen’s keeping its promise to double production to six buses a week in June and double it again when it moves to a purpose built factory in October.
But relying on outside suppliers got East Lancashire Coachbuilders in trouble before Darwen rescued it, when product development delays at Scania meant it was unable to source the chassis it needed.
That won’t happen again, says Mr Brian, because Darwen now designs and assembles the chassis at its R&D division, formerly Leyland Product Development, at Preston. The next stage is to:
…build a bus… fit it out, and then take the high value items such as engine, drive line, gearbox etc. etc. and plug and play those at the back end of the production process to send the product out of the door. Optare does this with 95% of the products they send out today…
He envisages a “pick and mix” solution using multiple suppliers, where customers…
…Come to us as a one-stop shop, choose the size of the bus, the colour, the specification on the seating and then [we] say OK how would you like to move that vehicle from A to B. Would you like an internal combustion engine? Would you like a low-emission… hybrid solution? Or maybe you’d like a zero emission electric solution?
Hybrid buses
That means it shouldn’t take Darwen long to develop the diesel-electric hybrid buses upon which much of Darwen’s investor appeal rests. Five years ago, Mr Brian says, development would have been protracted, but:
The reality today is that there is a commercially viable solution…. There’s a selection of proprietary items and technologies that come into providing hybrid solutions. Electric motors, energy storage devices - whether they’re super capacitors, or batteries. Gearboxes and things remain largely the same… Moving from a large diesel engine to smaller ones… All of those areas in their own right are extremely well established and fit for purpose… The value-ad for us is to act as the integrator.
It’s not just power that will differentiate the next generation of buses:
If you take two tons out of a double decker vehicle you will turn it from four and a half to five and a half miles per gallon, which on an annual fuel percentage basis is 20%… Weight is big factor. Everything from lightweight seats to new technologies and composite materials…
Darwen’s prototyping its hybrid now and it will launch it in November:
It’s not a ten-scale clay model. You’ll be able to feel it touch it, drive it… as we say kick the tyres.
For environmental reasons, Transport for London has already committed to ten Darwen hybrids, and expects all new London buses to be hybrid by 2012. Although the change of mayor has delayed them slightly, Mr Brian expects the orders in a “couple of months”.
Elsewhere take up will more likely be decided by economics, principally the cost of fuel:
The introduction of hybrid technology has an environmental benefit, but the principle driver is one around total life cycle cost. It will be cheaper than an internal combustion engine, and therefore it is in the interests of the operators…
By far and away the cheapest vehicle to run today on a by-mile basis is zero-emission all electric. The capital cost of entry is high, but reducing, and the application of the technology is typically focused at the smaller end of the market. So to apply that technology to a double deck bus would be a significant challenge today. I think it will get there, but it’s probably a few years down the line. Hybrid, I think is a here and now issue.
He says the popularity of his own car, a Lexus hybrid*3, and cars like it, demonstrate the technology is taking off - unlike rival alternative fuels like LPG.
Although TfL already runs hybrid buses supplied by Wrightbus, and Mr Brian concedes some manufacturers are:
… Selectively looking at opportunities.
He says the zero emission bus will be unique:
Now obviously our chairman and founder Mr Roy Stanley has quite a pedigree in the area and we certainly see it as an opportunity… outside London, in terms of rural districts community transport solutions, mobility solutions, park and ride, and historic cities.
Darwen hopes to debut a small zero-emission bus in November, too, but although the connection with Tanfield tantalises investors - Mr Stanley is chairman of both companies - Tanfield and Darwen aren’t working together:
We have access and ownership of our own technologies. Certainly the supply chain, in terms of availability of a lot of what Tanfield utilise will be similar if not the same for ourselves. Obviously, we respect the position they have in the marketplace and their strengths around commercial vehicles. We are looking to secure exclusive space for the same in passenger service vehicles.
Darwen
More than once, in this interview Mr Brian betrays his roots in manufacturing IT, his use of the term ‘plug and play’, his enthusiasm for outsourcing, just-in-time delivery and other by-words of faster moving manufacturing industries. To my mind, the opportunity to transplant those practices to bus manufacturing is as compelling a part of the Darwen story as hybrid buses, in fact the two go hand-in-hand:
It’s moving out from soup and sandwiches to something a bit more sophisticated.
Says Mr Brian. Mr Fickling says:
There’s one thing that I was really conscious of even though I’d been out of the industry, the sharp end, for about ten years, was that it needed new blood. It needed a real shake up.
Footnotes:
- And former chief executive of Sunderland football club. As an Arsenal fan, I’d have like to have chatted about the last match of the season, but there just wasn’t time.
- Not an airbrushed publicity shot, but taken by my own shakey hand - hence the slight blur
- Not flown in on a plane, like Paul McCartney’s was.
They’ve invited me to Blackburn in a few weeks, so if you’re interested in Darwen, get in touch. I’d like to know what you think. Comments below, email myfirstname.mysecondname@iii.co.uk .
Comments
4 Responses to “Darwen reaching for critical mass”
Leave a Reply
An impressive article. Darwen have some good ideas, - hybrid busses etc.
Thanks Mum
!
Like the look of this.
Both as a financial investment…
And a planetary one…
When can we buy!
dave
Hi Dave - nice to hear from you again.
They’re aiming for the end of the month he said - to publish the admission document for the merged company and get the suspension lifted.