It never ceases to amaze me what Private Equity firms get away with. We are warned constantly that buying from them often ends in tears but, like moths to a light, the investment community cannot resist handing over other people’s money to them at crazy prices. It looks like Uber and Airbnb are lumbering onto the runway. In 2004 private equity firms, CVC Capital, Permira and Charterhouse bought the AA (AA.) from Centrica for £1.75 billion. Ten years later they borrowed vast amounts of money and paid themselves £2.5 billion in “dividends”…
This left the balance sheet with negative equity of £2.37 billion, which they then flogged to City institutions for £1.2 billion in an IPO in June 2014 at 250p per share. That’s right, the City’s finest: Blackrock, Aviva, Lansdowne, Invesco and, of course, Woodford were falling over themselves to shell out £1.2 billion for assets of negative £2.37 billion. One of the reasons given for the IPO was “to reduce Group borrowings and associated interest costs” – this from a company that months before borrowed a net £2.6 billion to pay out in dividends!
Despite a further equity raise in 2015 of £200 million (385p this time and yes Woodford topped up) and the sale of the Irish AA for €157 million, the AA still has negative equity of £1.6 billion. Its dividends have been slashed and its share price at 79p has gone down in a straight line for 3 years to the point where, at £483 million, it is worth less than half the price at which it was demutualised and acquired by Centrica twenty years ago.
This shocking emasculation of a proud and iconic brand is a disgrace and is a good example of what often results when fee-hungry bankers and self-regarding investors get together for a little financial engineering with their clients’ money. I am short shares in AA at 100p as this is not a great time to be holding over-borrowed companies. I concede that they have fallen a fair bit since then and understand that people may think that this boat has been missed. But if nothing else the sorry saga of the AA should be remembered the next time private equity offloads a big name to uncritical investors. There are many coming down the track on both sides of the Atlantic.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece from Lucian shortly click HERE
Filed under: AA plc, ASOS, Bearcast, SSE, Sosandar, N50 website
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