Saga plus AA equals ?
I am hearing that the biggest ever merger in the UK of two private-equity owned firms is about to be announced.
Saga, the financial services and publishing business aimed at people of a certain age, is buying the AA. It will create a business that if it were a public company would certainly be big enough to be in the FTSE 100.
My guess - and it is a guess - is that the enterprise value of the newly merged company would be around £6.15bn, with the AA valued at £3.35bn and Saga at £2.8bn.
It looks like something of a financial triumph for the AA’s owners, the private equity groups Permira and CVC. They bought the AA two and a bit years ago for £1.75bn - but that business now has an enterprise value (the value of the equity plus debt) of £3.35bn.
The reconstruction of the AA carried out by Permira and CVC may have attracted the ire of the trade unions. But it has succeeded in increasing the value of the business very significantly.
UPDATE: This deal is another PR triumph for private equity. Please take that in a spirit of unbridled sarcasm.
The press release issued to announce the merger is a model of waffle. It talks in rosy terms about what these two businesses can learn from each other and how Saga products can be sold to AA customers and vice versa.
But as for the sort of facts and numbers you would expect to see when two public companies merge, almost none are in evidence.
Which is a bit of a slap in the face to the thousands of employees of the AA and Saga, and also to any savers in pension schemes that are invested in the private-equity funds behind these companies.
What is the impact on jobs? No mention of that.
What cost saving could be made? No guidance given.
How about the scale of incremental profits? No clue provided.
Nor was any useful detail or assurance about the impact on jobs given to the AA's staff union when it met the company's management at 9.30 this morning to be told that staff were shortly to have a new employer.
Naturally I contacted executives at the AA and the private equity firms to talk about all this. But I was told only one man was authorised to talk about the deal, the CEO of Saga, Andrew Goodsell.
As and when I get hold of him, I will pass on any further intelligence I can harvest. But don't hold your breath.
UPDATE: The merger of Saga and the AA is triggering a substantial payday for thousands of Saga employees – and a humungous one for the chief executives of the respective businesses.
Some 1500 Saga employees are shareholders in the business. Most of those paid £20 for what is known as sweet equity some two and a half years ago. Those shares will pay out £10,500 when the deal putting together Saga and Permira is completed later this summer.
Of that £10,500, 75 per cent will be paid in cash, with the remaining 25 per cent rolled into new shares in the business.
It's nice profit and is a rare example of private equity firms allowing the spoils of their dealmaking to be shared with hundreds of staff - which many will see as no more than fair. The risks for employees frequently increase in the wake of a private-equity takeover, but typically their rewards are slender.
However the spoils for Saga’s chief executive, Andrew Goodsell, are an altogether different order of magnitude. His shares will be valued at around £150m, of which he will pocket around £110m in cash.
As for the AA’s chief executive, Tim Parker, he is understood to be cashing in his entire stake, which is worth around £50m.
UPDATE: Last word on this for tonight, in response to a number of comments. It is difficult to know precisely how much the owners of the AA, Permira and CVC, have made from this deal. But there is no doubt they have made a mint.
The uncertainty stems from the lack of disclosure about the debt-equity split when they bought AA for £1.7bn two and a half years ago. As I've already said, what we do know is that the £1.75bn enterprise value has become £3.35bn.
However, my understanding is that CVC and Permira invested £500m from their funds in the AA, all of which has already been repaid through a refinancing. So for a zero net cost, they are left with an asset valued by the Saga deal at more than £1.5bn - of which they may well cash in a further £900m. Nice work, as they say.
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Not sure if I get it.. If they originally paid 1.7bn for the AA, surely that's the value of the equity, not equity plus debt? If the 3.4bn includes debt, it's difficult to know if any value has been added at all..
Where's the value add of merger? Vehicle recovery for elderly drivers? A national network of travel agents? Cross marketing deals are worthwhile, but you can strike deals without a merger.
All of the sensible acquisitions have passed. This looks like the marker point for the peak of the current merger boom.
You will find, if you do the research, that Tim Parker has a long track record of turning around or adding value to enterprises including: the AA, Kwik-Fit, Clarks Shoes, Kenwood.
Interestingly before his MBA at London Business School he worked for the Treasury for a couple of years. Maybe Gordon Brown should sign him up again, but more likely is that one of the Private Equity firms will be lining him up for a really mega deal.
Hey Peston
According to centrica's web site the AA was sold on a "cash free, debt free basis".
Three years later it now has £1.9bn in debt.
If you analyse the "enterprise value". Ie. strip out the value of debt ( £3.4bn - £1.9bn ), then you will see that the real value of the assets is only £1.5bn.
As it happens, this is almost the same figure as what it was purchased for three years ago!!
They have not increased any value. Only the debt levels.
Robert - any M&A always brings some anxiety about future course of action regardless of type of owners i.e. we should see this success story in positive light but no doubt little more transparency about deal is desired.
I'd have thought the reliability of Toyota, Nissan, Mazda, Lexus etc. have pretty much eliminated the core USP for the AA. Saga and the AA have just be come brands to re-sell other services with a large mark-up. And the internet removes margin - this seems more like a merger of desperation.
Prof Pat,
Shhh! don't give the game away! Let Robert witter on I find it amusing.
You will also find that Saga is pretty much the same story in terms of debt and 'value creation'. The debt burden is too high for the UK listed firms to purchase either the AA or Saga without either destroying either shareholder value or their credit ratings. Hence, there are limited opportunities for an exit by trade sale.
Plus given the fact that there has been no value creation and the UK insurance cycle remains at the bottom, prospects for a decent IPO also look dubious.
The cynical amongst 'us' guess that the plan is by combining 2 'non-IPOable' companies (thereby making like-for-like analysis difficult), the waters will be muddied and if premiums have improved, as expected, they might be able to get this Frankenstein like creation away. Either by IPO or to the usual Euro-bozos like Allianz or ZFS.
MM
I heard your report on PM. Why should these private companies have to reveal the same level of information expected of public companies? That is one of the benefits of being a private company whether they employ 50, 500 or 5,000 people. At least private companies are not shackled by the heavy demands of the City and the media and can take a longer view. By their very nature, public companies are now risk averse bodies nervously looking to meet their next half year target. I know, I used to work for one. Investors in private equity companies rely on the managers to make the best returns for them. Where do you draw the line on what information is "sufficient" anyway?
Hmmm... I've been with the AA for about 10 years, but am about to leave them after my wife and two small children had to endure a late night/early morning recovery fiasco lasting nine hours.
I could have flown to New York in less time then it took their staggeringly inept (and potentially dangerous) 'priority' recovery service to get my family from Kent to Leicester.
£1.7bn? £3.bn? The Private Equity owners must be laughing all the way to their friends at the bank.
I think this will be the first of many private equity business mergers.
I think Saga, a company that I know well, will lose some of it's core values with the AA and fear the over 50s might not get the best.
While I was disgusted by the seeming government cover up over the Saudi/UK/BAE deal, I am at a loss to understand what right the US government has through its Justice Department to interfere in a deal between two sovereign states by opening its own investigation? Is BAE US owned, (I know it has a US subsidiary) or while Mr Blair was in the US for the last time, did he sign the UK up as the 53rd state of the Union?
Lots of ill or mis-informed comment here. The finances work exactly like a house purchase with a mortgage. So if Permira bought AA for £1.7 billion, it would have been around £500 million in equity and £1.2 billion in debt. If the debt was subsequently re-financed then it would likely have been to secure a lower rate. So the £3.4billion probably still includes about £1.2 billion of debt, valuing the equity at £2.2 billion, over 4X their investment.
Now the interesting bit. The private equity funds take 20% of the profits or £340 million shared between a fairly small group of partners. You can figure from Permira and CVCs websites. The bulk of the profits go back to the institutions which invest through the private equity funds; who are mostly pension funds
I couldn't agree more with what Archie wrote. It appears that some contributors have not grasped the basics of leveraged acquisitions. Furthermore, I understand that the private equity owners of the AA had already extracted dividends equal in value to their initial investment, whilst retaining the business, which had grown in value.
Prof Pat #7, if your assertion that AA was sold debt free is correct, I have to agree with Archie #11. This deal would value the assets of the company at 1.7bn, regardless of the mix of equity and debt used to purchase it. If those assets are now worth 3.4bn that's a big value added.
So does it work out a good deal for the staff of these companies ?
What if Saga had decided to go for a floatation ???
My Wife works for the AA and has done for more than 10 years.
In Business companys change as we all know and the AA are no different.
They have changed from a well oiled customer related company, to a ruthless who cares about the staff only interested in minutes on the clock type of company. We hear about what call centre's try to do for their staff all the time. This is not the case for the AA. If my wife is sick 3 days a year she will be disciplined! If she is late by 5 minutes to work, she is harrassed contstantly to make the time up.
Please take into consideration when she works 15/20 minutes over each day this is never taken into considertion but just for granted!
Each member of staff is given time too sign out,so they can go to the toilet, if this is more than 5 minuters a call comes from IT to ask why is the person signed out! The staff are constantly made to feel unwanted and pressurised in to selling Insurance, which is not why they joined the company! Who cares who's happy as long as they work!
As the Advert's says if you call I'll be their! Or to put it another way day forced to work unsocialable hours for very little pay with no appreciation. Roll on the next company who will own the AA!
The staff have been beaten to the ground and are very unmotivated!
What a good way to make money!
Don't believe me? Ask every staff member who has been their for at least 10 years!
Dearest Archie & Co,
It doesn't work like a mortgage. Unless the mortgage you are refering to is a buy-to-let (as it needs to generate income not just capital gain) in which there are strict caps on the amount of debt to equity (either due to the banks or more likely the FSA as its a regulated insurer). Further, the renting of this house was the sole activity of my business (to allow you to get the valuation based on expected earnings). If this is what you meant, I apologise.
Neither did I specify what I meant by 'value'. For which I apologise. I would mean it in the way Alfred Rappaport would use it.
Returning to your mortgage analogy. I buy the house, put 2 people in every room and fail to decorate and repair anything. The 'value' of my business will go up both in 'book' terms after a couple of years(allowing me to do a recap to extract equity at a later date) and on a basic DCF valuation, 'my business' would also increase.
But have I created any real 'value' in the medium to longer term? or have I executed a number of short term actions and used leverage to give the appearance of it? Ultimately, the quality of the tenant is likely to drop (lowering income, look at all the complaints on this blog about service) and the ultimate repair bill gets bigger.
Plus I need to find somebody to pay my assessment of the value of this business at a future date. Which after Debenhams and a couple of others is becoming increasingly difficult.
Nothing illegal in what they have done and trust me I have no affiliation with the unions. I would dispute they have created any sort of long term sustainable value but do not contest the profit they have made for themselves.
Happy to go on if you are still reading?
Prof. Pat's seems to speak with considerable authority on the subject given his monumental misunderstanding of what a 'debt free - cash free' acquisition means.
This simply refers to the debt and cash (net debt) that was in the business before the buyout. To put it more simply - you don't take on the previous owners mortgage when you buy a house, but you will be buying it with a mortgage of your own.
Smething needs to be done to moderate the respect (or lack of) that the private equity industry has for the many employees it takes over. I work for one such very successful company, sold for a vast sum to its Spanish owners, yet the employees, the creators of the entire wealth, are treated like dirt. How about passing some laws to strengthen the power of the trades unions, Mr. Brown?
Well, lot of debate, but have cvc,permira & charterhouse actually done anything wrong, not really.
All the money making city types have their noses in the trough of easy money.
Spare a thought for the feckless AA staff who have no ESOP (employee share option), some have worked at the AA for 20+ years and will not get a bean, meanwhile Tim Parker been here 3 years and gets 30+ million, and still spits his dummy out.
The rich get richer, the AA staff get poorer.
Come the revolution, eh Tim
I read with dismay the constant aquisitions and mergers made by these Private Equity companies and all the Hedge-fund non-sense.
The AA is supposed to be the "4th Emergency Service" as their TV Ad puts it, why don't they just concentrate on that instead of all this financial product cross-selling?
I predict that ultimately Private Equity firms will have done a huge diss-service to the UK economy as a whole. We are in a shocking state of affairs on this. Especially with foreign investors, and all the greed around.
I dispair.
Dear Robert,
Clearly Britain is now socially divided, the haves and haves not, and everyone whose earnings are below £50,000 are struggling to make ends meet.THIS REALITY,is the catylist for a down turn in the economy, Browns policies, will cause serious problems for those on average wages it is estimated that over 500,000 are unable to keep up with payments on their mortgages even now, stand by for some serious economic results.
DearRobert
There is going to be a run of attacks on Sir Richard Branson and his empire.Venture capitalists are in the run to make a profit and load the company with millions of pounds of debt, IT HAS ALREADY STARTED.
The point is Venture Capitalists are ruining the stock market and making it vunerable to bids as listed companies go under the hammer?