´óÏó´«Ã½

Saga plus AA equals ?

• Robert Peston
• 25 Jun 07, 10:45 AM

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.

• Permalink
• Comments