NAPERVILLE, Ill. When it was announced last month that Britains biggest bus company planned to buy Laidlaw International, the No. 1 operator of school buses in North America, much of the comment generated by the deal focused on Laidlaws dogged subsidiary, Greyhound Lines.

There was immediate speculation Greyhound could be headed for yet another uncertain destination. Perhaps sold, spun-off or downsized even more. In article after article there was sentence after sentence suggesting Greyhound wasnt a good fit with FirstGroup, the company that proposes to buy Laidlaw for $2.8 billion.

FirstGroup CEO Moir Lockhead and Laidlaw executives remained mum about plans for Greyhound, helping stoke the speculation and conjecture.

For his part, Greyhound President and CEO Steve Gorman confirmed that Greyhound is in limbo.

In a message to employees, Gorman said "no decision has been made on Greyhounds future. No decision will be made until the deal closes. At that point, a decision on all key assets will be made by FirstGroup. Until then, it will be business as usual at all of the operating companies, including Greyhound."

While it will be weeks before anything concrete develops, that hasnt slowed British media and some financial analysts from spinning out scenarios that would have Greyhound being bought by Stagecoach Group, the Scottish parent company of Coach USA and Coach Canada.

After all, the thinking goes, Coach USA and Stagecoach are ginning up megabus.com in the U.S., and there are strong indications that an expansion of megabus.com is in the offing. Currently, megabus operates only in the Upper Midwest, with Chicago as its hub.

In a reality check, it should be noted that Greyhound has never been much of a fit with Laidlaw either. Since it was merged into Laidlaw eight years ago, Greyhound has continued to operate quite independently from its headquarters in Dallas. Synergies with other Laidlaw operations have not been in abundance.

Greyhound accounted for less than 33 percent of Laidlaw's revenue in the first quarter of fiscal 2007, down from 40 percent for all of 2006.

FirstThings first

Meanwhile, FirstGroups takeover of Laidlaw is the first order of business for both companies and, in the eyes of most analysts the deal makes a great deal of sense.

No. 1, it would combine North Americas two largest operators of school buses. Laidlaws fleet numbers 41,000 yellow buses and the FirstStudent subsidiary of FirstGroup operates 22,000. The third-largest school bus operator in North America also is a British outfit, National Express.

In explaining the deal to employees, shareholders and the investment community, Laidlaw heavily emphasizes the cost savings to be gained. Overhead, administrative and development costs will be reduced and spread over 63,000 buses instead of 41,000, it was noted.

In London, it was reported that FirstGroup expects the deal to generate approximately $70 million in pretax savings in the first full year following its completion. However, in a conference call with financial analysts, Laidlaw President and CEO Kevin Benson said he didnt know "where they got the ($70 million) number from, and I cant attest to it."

At Laidlaws annual shareholders meeting last month, and in subsequent statements, Benson noted that Laidlaw and FirstStudent are facing significant competitive pressures in the highly fragmented school bus contracting industry.

To meet the competition, he said, industry giants like Laidlaw and FirstStudent are going to have to invest in new technology to reign in costs so they can remain competitive with smaller companies that have much lower overhead.

For example, in recent years Laidlaw has worked with manufacturers to build it school buses that last longer, reducing its bus investment costs.

No fun being public

Benson also noted that merging Laidlaw into FirstGroup will eliminate huge expenses the company incurs by being a public company and having to comply with federal Sarbanes-Oxley Act audit and financial reporting requirements. "A lot of that reporting simply goes away" by virtue of being owned by a British company, Benson noted.

Laidlaw is not alone among American companies that chaff under the reporting burdens and costs imposed by Sarbanes-Oxley, which was an outgrowth of the corporate scandals of the late 1990s and early in this decade.

The second merger synergy noted by executives is that both FirstGroup and Laidlaw manage public transit systems in the U.S., with FirstGroup one of the largest private-sector providers of transit management and contracting. The companies operate in major cities, including Los Angeles, Houston, Denver and suburban Chicago.

FirstGroup also is one of the largest providers of airport shuttle bus services in the U.S., serving airports in Baltimore, Philadelphia, Miami and other cities.

Additionally, Laidlaw and FirstGroup operate paratransit systems, campus shuttles, call centers and other light transit activities.

Heck of a deal

The proposed deal also is being touted as favorable for Laidlaw shareholders, though there have been questions about why Laidlaw management didnt put the company on the auction block and see if a higher bidder could be found.

Under the agreement, FirstGroup will acquire all of the outstanding common shares of Laidlaw in an all-cash transaction valued at roughly $3.6 billion. That amount includes assumption of $800 million in Laidlaw debt, making the actual purchase price $2.8 billion.

Laidlaw stockholders are to receive $35.25 for each share of Laidlaw common stock they hold. The deal has been OKd by Laidlaws directors and they have recommended that stockholders also approve the transaction. A vote by shareholders is some months away.

Since Laidlaw emerged from bankruptcy four years ago with a clean balance sheet, a changed name, and a public stock offering, the price of Laidlaw shares have gone from $7 at their low point to over $29 at the end of January, before the merger was announced. Some have wondered how much near-term upside investment potential remained in Laidlaw shares given the financial challenges the company faces in terms of reviving Greyhound, keeping the school bus operations competitive, and rising labor costs.

Said Benson: "Our goal for the past four years has been to develop, demonstrate and deliver shareholder value. We believe this transaction is the epitome of that goal and represents an excellent opportunity for both companies employees and shareholders.

"The combination of Laidlaw and FirstGroup will bring together well-known brands and well-respected companies that share a very strong focus on employee and customer satisfaction. It will provide a sound economic and operational base from which to continue many of the efficiency initiatives that we have underway."

FirstGroup plans to finance the acquisition through a bank loan and share issuance.

Pesky regulators

In addition to the talk about the mergers possible impact on Greyhound, other speculation has centered on the issue of regulatory approval and possible anti-trust implications since the transaction would combine the two largest private school bus operators in the U.S.

Benson addressed the issue in the conference call with analysts, telling them that "clearly" he was confident the transaction would win regulatory approval, and he said his confidence was shared by the Laidlaw board and FirstGroup.

"We would not have put the amount of time into it that we have to get to where weve got" if executives, attorneys and investment consultants didnt think the deal would clear regulatory hurdles, Benson told the analysts.

There are roughly 495,000 total school buses operated on a daily basis, with 330,000 owned and operated by public school districts. The 63,000 operated by Laidlaw and FirstGroup represent about 13 percent of that total. Of the 165,000 school buses operated by private contractors, Laidlaw and FirstGroup operate a combined 38 percent.

No love

After the deal was announced, Standard & Poor's Ratings Service placed FirstGroup's short-term credit rating on watch with negative implications.

"The CreditWatch placement reflects the weak business profile of up to 50 percent of Laidlaw's operations and the increase in debt leverage required to undertake the acquisition," said S&P credit analyst Leigh Bailey. "These factors are together expected to dilute FirstGroup's existing satisfactory business profile and could also pressure credit ratios."

The unions that represent Laidlaw and FirstStudent drivers also have been critical of the deal.

The International Brotherhood of Teamsters said it was concerned about the service record of First Student, particularly when it came to safety violations.

More than 30 drivers attended Laidlaws annual meeting, and some questioned Benson about the merger.

"FirstGroup has been an anti-union company," declared Louis Malizia, assistant director of capital strategies for the Teamsters. "As we study the details of this merger, if we find that we have a lack of confidence in FirstGroup's administration in the U.S. then we'll oppose this merger in any way we can."

In response, Benson said: "I don't think anyone who drives a bus here has any reason to worry."