Former John Lewis boss and current mayor of the West Midlands Andy Street, is being brought on board to advise with the East Coast Main Line services being taken back under government control.
Rail bosses have said they are "surprised and disappointed" that the Government chose not to award it a new deal.
Speaking to parliament today, Grayling said after two months of analysis he had concluded that taking the East Coast line back into public ownership would provide the smoothest transition to a new operation.More news: 'No flats policy': Kristen Stewart ditches heels on Cannes Red Carpet
He said the aim was to create a new public-private partnership from 2020, with "one simple team operating the railway".
An "Operator of Last Resort" run by officials at the department will take temporary charge of services, he told MPs.
VTEC is the third private operator to fail to complete the full length of a contract to run services on the East Coast route.
But Stagecoach reported losses on the line and in November previous year Mr Grayling announced that the franchise would be terminated in 2020 to enable it to become a public-private railway. The company also has already funded its full GBP165 million loan commitment to the East Coast franchise.More news: When does the Premier League transfer window open and close?
Stagecoach's chief executive Martin Griffiths estimated the company's total losses at £260m, in February.
Labour described the decision to end the £3.3 billion contract as a "bailout". During that time, we have attracted more passengers, greatly increased investment, achieved industry leading customer satisfaction and made significant payments to the taxpayer to reinvest in public services.
At the time, Virgin Group owner Sir Richard Branson said the partnership's bid for the franchise was "based on a number of key assumptions and a promise of a huge upgrade of the infrastructure by Network Rail", which faced delays.
"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".More news: Brazil's President Temer calls for FIFA World Cup title