AA okay?
Jump starting the UK’s 4th emergency service
The AA’s in a potential bidding war/takeover. https://www.thetimes.co.uk/edition/business/aa-attracts-rival-private-equity-bids-w06l3wnrg
Could get exciting. I’m long and wrong to date…so perhaps just ignore me….
I took a full position in AA at 50p (started to build in 80s) before the pricing on its debt started undermining it….I then topped up at 15p mid Covid. Its not been my finest investment to date.
AA was always a bit unusual for me as I wouldn’t normally take a full position in something with clear and present catastrophe risk….but I originally believed I could see a manageable debt deleveraging story to >10x over 7 years and negativity on the brand (rather than the balance sheet) was misplaced. IMO there’s real future upside to the brand if one can just disassociate it from a ridiculous balance sheet.
My original vision has been struggling to raise its head since yields in general backed up last year and then Covid crapped from a great height to.
Its a super reflexive situation. Price deteriorates and everything looks multiples worse. Price improves and its looks multiples better.
The above article emphasises a take private by private equity. Perhaps The AA could stay listed and de-risk? A good route to that would clearly be the most advantageous for current equity…
With a £1bn debt for equity swap the AA suddenly would potentially look like a high quality low to moderate growth company. In fact, it wouldn’t be embarrassing to stack it up against, say, Diageo -> it would look a bit over levered relative to Diageo but not ridiculously so and with similar margins, potential for greater growth/return from investment, more dominance of its area and less volatility in returns. (Clearly £1.3bn is a better number than £1bn but trade offs etc…and reaching for the sky already).
Price that £1bn+ at 25p and its a tsunami of dilution (4bn shares added to current c.650m). £120m annual profit (estimate based on reducing interest payments and other debt maintenance ‘exceptionals’ that spring from the whole business securitisation structure) and you get c.2.6p per share earnings. 25p is 9.6x….probably deserves a teen multiple at least and if it got to 20x (discount for size and bit more leverage to Diageo) then 52p per share. Nice 100% return for new equity and old …with a really good forward return story from moderate top line growth and significant 5+ years gradual deleveraging.
How about they raise the £1bn at 125p….bear with me…I know that sounds outrageous!…
Well dilution is not nearly so bad. 800m new shares and total shares in issuance now 1.45bn. Take the same £120m annual profit and we get 8.3p eps. Put 20x on we get 166p per share. Old shareholders like me party as we get 564% return!….New shareholders ain’t so exuberant as they only get 33%
Ummm. Okay…lets do 75p -> 2bn shares total. 6p eps -> 120p per share -> 380% return to me and 60% to new guys.
Aaaannnddd….50p -> 2.65nb shares. 4.5p eps -> 90p per share -> 260% for me, 80% for the new guys.
Me, Albert Bridge Capital, Davidson Kempner, Cleveland Square and Parvus own 46% of the equity (0%, 16%, 15%, 10% and 5% respectively — obviously I’ve rounded my sizeable stake to the nearest whole number). Now we are some hard hitting mofos at the negotiation table.
DK are serious players…hardcore (the name frightens me a bit)….and Albert Bridge and Parvus no pushovers either. I’ve never had contact with Cleveland Square but as a vehicle for billionaire Gary Klesch (https://en.wikipedia.org/wiki/A._Gary_Klesch) I’m pretty sure they are handy in a negotiation. Then there’s a bunch of other institutions that will happily ride the coattails of these guys and hold up their end decently.
The really big dogs…the investment grade bond holders…are not in the room yet. Its not time. They’re still running down their incredible plodding clock to armageddon.
Want to do something other than wait for slow death through debt strangulation then you going to have to throw us a bone. I don’t know about the other guys…they haven’t called me yet :) ….but I ain’t barking at 25p. But where do I start to roll over and let them tickle my tummy?…
I think its north of 50p. How far depends on how much the blocking quartet are willing to stump up as part of any D4E swap. Collectively we are talking something >$70bn in AUM (perhaps a decent bit higher) so pockets are deep enough to play a decent wedge of £1bn into the raise.
I’d guess enough to play the price to 75p? Maybe more, depends if they can have big outsiders interested in the deal and happy to pick up a 50% ‘no hassle’ scrap rather than a down and dirty 100%. Its all rather complex and super super reflexive.
In addition, the above simplified thoughts underplay the value created in a number of dimensions;
1) Investment grade issued debt pricing goes back to the floor and most/all of high costing high yield debt is repaid then the earnings pick up is larger than assumed above
2) AA has gone through a rather earnings deleterious investment program in last few years and capex/opex associated with it reduces
3) There’s a high ongoing ‘exceptionals’ charge that comes from continual refinancing of the debt pile. That’s no longer necessary
4) FCF should be a bit better than earnings going forward as level of investment moderates and amortisation > ongoing investment
All in all a reasonable modeller might think £120m profit is too low and that >£150m is not unreasonable. That starts to make 100p possible (80% upside for new equity)
Anyway. There’s so much that can happen here….but as the game is now in play in earnest stuff could move really quick. There’s scope for people to make loads of money through some compromise rather than pushing to an explosion…so that gives decent chance of profitable compromise.
Approx average acquisition prices (done by some v crude eyeball averaging so assume wide margin for error):
Albert Bridge 40p
Davidson Kempner 25p
Cleveland Square 100p
Parvus 220p
To some extent Parvus are so far out of the money and their stake at 5% is way reduced from 25% that perhaps they are just passengers.
The rest are pretty actively engaged on what the price can be as they dance on a spectrum of made whole to big return bragging rights. A lot depends on whether this cohort sees the mutual gain or whether one (DK!?) have a trick up their sleeve. IMO it adds to the potential for public equity value creating recap rather than take private full stop. Get it right and AA can be a long term multi bagger assuming that operations are good too (I believe they are and on an improving trajectory but that’s obscured by balance sheet madness).
But hey, maybe the stock does go private…. my guess is that the 40p rumoured current bid is too low and that the minimum is at least 60p and probably a bit more of the way to 100p given who PE need to wrestle control from. But depends on the stomach to fight or just ditch the shitshow.
The biggest downside risk to me would be if DK wanted to take it private…then they could squeeze a lowish number for takeout…say the 40p gets Albert Bridge to bail with blushes spared and then everyone else is running scared. But why would DK do that when they can make a lot of money quick rather than a bit more slow? Plus why didn’t they slap a 30% bid premium on 15p when it got all the way down there?
DYOR….hairy and risky…perhaps all the above is fairytale…
Your mojo out
