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STOCKS NEWS EUROPE-FirstGroup extends drop on franchise fall-out

Shares in bus and rail firm FirstGroup fall 3 percent to 190 pence,extending last week's losses, as the market digests what the Britishgovernment's U-turn on the West Coast rail franchise means for the company.

On Oct. 3, the Department for Transport tore up the franchise bid it hadawarded to the company in August and froze three other franchise competitionsafter it found serious flaws in its own handling of the process.

Analysts say the move has put significant pressure on the debt-loaded group,and is likely to prompt a dividend cut and/or rights issue.

Deutsche Bank estimates net cash outflow of 30 million pounds in 2013 forFirstGroup, on net debt of 2 billion.

"Based on these forecasts we feel the dividend debate is not if but by howmuch the payout will be cut and we think less is more in this regard," theanalysts say, adding that priority needs to be given to debt repayment and UKbus investment rather than shareholder return.

The broker cuts its price target to 175 pence from 220 and maintains a'sell' stance.

Barclays also cuts its target, to 210 from 230, but is more sanguine aboutFirstGroup's outlook, keeping an 'equal-weight' rating.

"We think an ample-sized rights issue is currently priced in, and FirstGroupmaintain earnings upside risks from U.S. turnarounds in Student and Greyhound,coupled with possible franchise wins," Barclays says.

However, the debt pile leaves "little room for disappointment" in thecompany's earnings and ongoing bus division sales, the broker adds.

Reuters messaging rm://rosalba.obrien.reuters.com@reuters.net

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