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Sunday, August 15, 2010

Saga and the AA float along on a sea of debt

Acromas is the holding company behind the AA and Saga. Thanks to one of those eye watering deals, done at the height of the private equity era, it is running as fast as it can pay its mountain of debt.

The group operating profit of £183.5m was wiped out by interest payments of £705m.After including a small loss on the group’s pension schemes, the pre-tax loss was £529m.

In June 2007 a private equity consortium acquired the group in a deal valued at £6.3 billion funded by £4.8 billion of bank borrowings and £1.5 billion of shareholder loans. The three buyout firms in the consortium put only £1m of equity into the deal. Before the merger, AA and Saga had £2.8 billion of debt between them.
As from nowhere a couple of extra billion pounds was added to the value provided an excellent reward for the financial wheeler dealers.

The result is a group of companies with a massive debt that is out of all proportion to the ability of the business to repay.

The accounts show that net debt rose last year by 3.5% to £6.4 billion, including bank loans of £4.9 billion, which its owners do not have to start repaying until 2015.

The only way out of this position is to float the company but somehow I don’t think the City will be that daft.
Last week Saga made a £102m takeover offer for Nestor, one of Britain’s biggest providers of home carers. I just hope the management of Nestor only consider a cash deal.

It is interesting that Saga is moving even further into the residential care market. I wonder if they think they are selling to their existing customers or their children? As Saga’s customer base ages it would seem sensible to recognise this fact and forget any pretensions to be targeting the baby boomers and focus on the old-old. Dick Stroud

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