Stagecoach owns 90 percent of the East Coast franchise alongside Virgin.
Stagecoach said it and Virgin had been negotiating for a new contract with the Department for Transport but that it understood Mr Grayling was "no longer considering" them for the deal.
'I plan to use a period of Operator of Last Resort control to shape the new partnership.
The troubled East Coast rail service is to be renationalised after current operators Stagecoach and Virgin could not meet payments..
Stagecoach chief executive Martin Griffiths said he was "surprised and disappointed".
The public transport operator said the UK Department for Transport has made a decision to appoint "Operator of Last Resort" for the East Coast train service and is "no longer considering" entering into a new franchise contract due to heavy losses incurred by Stagecoach and Virgin.
Stagecoach Group said its understanding was that the announcement does not directly affect other franchises and bids for franchises in which the company has an involvement.
He added: "However, we respect the Government's decision".
The company pledged to "work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements".
Trains on the East Coast Mainline will gradually transfer to LNER branding from VTEC branding.
But now the Financial Times reports that Grayling may be considering scrapping the franchise, which would be the third time in less than a decade that the government has been forced to act on the contract.
"After three shambolic private sector failures on the east coast, the message should now sink in that these cowboys can not be trusted and should be locked out of the system on a permanent basis".
"In all circumstances ownership of the infrastructure will remain in the public sector, but the railway is at its strongest when it is a genuine partnership between public and private".
He said: 'It's important staff and passengers are properly protected while, once again, the transport secretary tries to patch up a failing franchise system that everyone knows doesn't work.