Officials at the Department for Transport (DfT) agreed to start talks on a bailout of National Express’s east coast franchise in May, it has been revealed, contradicting claims last week by Lord Adonis, the transport secretary, that there had been no negotiations.

The agreement was set out in a letter sent to National Express on May 1. The two sides made a commitment to talk for a month about the creation of a new “management” contract for the London to Scotland line.

As part of the deal, National Express pledged to continue to operate the existing franchise until the end of the year. The letter was signed by a senior manager at the DfT.

The revelation of the letter comes as National Express chairman John Devaney has called in Greenhill, the boutique investment bank, to advise on the company’s future. Devaney is considering whether the heavily indebted transport group can raise money through a rights issue — which analysts think will be difficult as long as uncertainty over the company’s rail operations remains.

Devaney’s other option is a deal with a rival. FirstGroup, led by chief executive Sir Moir Lockhead, has already made an informal bid approach, with some transport bankers saying that Stagecoach, which is led by founder Brian Souter, could also be interested.

National Express refused to comment yesterday, but senior sources at the company have confirmed they received the May letter, and at the time expected the talks to go ahead. But the talks never happened — a key member of the DfT negotiating team went off sick and in the meantime, the department’s attitude hardened.

Even so, it is understood that National Express was confident it had reached a deal for an amicable handing back of all three of its rail franchises — the east coast line, C2C, which runs from London to Southend-on-Sea, in Essex, and East Anglia. Devaney went to see Adonis nine days ago to rubber-stamp the agreement, only to be told there was no deal, a senior industry source said.

After National Express said it would walk away from the franchise last week, Adonis insisted he was “not in the business of bailing out companies that are unable to meet their commitments”.

“The government isn’t prepared to renegotiate rail franchises,” he said.

A DfT spokesman said yesterday: “We are not going to get into a running commentary. As the secretary of state said, there was no offer of a management contract made to National Express.”

Adonis was reported yesterday to have yet to decide whether to remove National Express’s two other rail franchises. Normally, cross-default clauses in franchise agreements mean that when a transport group gives up one service, it risks losing all of them.

National Express, however, has received legal opinion that it is not in default, despite saying that it is likely to hand back the east coast line. Some executives believe it might still be able to hold on to the line if it can raise extra funds and passenger numbers pick up.

Some analysts believe that National Express might not be able to find a white knight should it fail to secure a rights issue. Gerald Khoo, analyst at Arbuthnot Securities, pointed out that FirstGroup itself did not have a strong balance sheet.

“We believe it \ would have to make a further substantial equity issue to bring both companies’ net debt levels down to acceptable levels.

“We consider it more compelling for groups interested in certain National Express operations to pick them up individually if the group were to sell large parts of its business, or attempt to break itself up,” said Khoo.

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