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| The AA should be a reliable runner – but it's dented by £2.7bn of debt | The AA should be a reliable runner – but it's dented by £2.7bn of debt |
| (21 days later) | |
| Here comes Simon Breakwell, hauled from the crew of non-executive directors, to perform running repairs on the AA as its new chief executive. His first tweak? A delay to an IT upgrade and a warning that an extra £35m must be spent. The shares hit another all-time low. | Here comes Simon Breakwell, hauled from the crew of non-executive directors, to perform running repairs on the AA as its new chief executive. His first tweak? A delay to an IT upgrade and a warning that an extra £35m must be spent. The shares hit another all-time low. |
| On the plus side, boring talk about computers makes a change from recent excitement, such as last month’s removal of executive chairman Bob Mackenzie for gross misconduct after an altercation with a colleague in the bar of a Surrey hotel. We’ll leave the two sides’ lawyers to chew over the details of the incident and ask a different question. How is that the AA, which ought to be the model of a dull and reliable investment, has performed so dreadfully for shareholders? | On the plus side, boring talk about computers makes a change from recent excitement, such as last month’s removal of executive chairman Bob Mackenzie for gross misconduct after an altercation with a colleague in the bar of a Surrey hotel. We’ll leave the two sides’ lawyers to chew over the details of the incident and ask a different question. How is that the AA, which ought to be the model of a dull and reliable investment, has performed so dreadfully for shareholders? |
| The core product, a roadside breakdown service, is a must-have for most motorists. The brand is well known, the field of direct competitors is small and the cash flows are mostly solid. Steady progress ought to be easy. Instead, the AA’s have fallen by a third since it has brought to market via a management buy-in in 2014. | The core product, a roadside breakdown service, is a must-have for most motorists. The brand is well known, the field of direct competitors is small and the cash flows are mostly solid. Steady progress ought to be easy. Instead, the AA’s have fallen by a third since it has brought to market via a management buy-in in 2014. |
| The short explanation is debt – too much of it. The AA arrived from the world of private equity, in this case CVC and Permira, and has continued the same aggressive financing model (with potential jackpots for executives, naturally) in the public arena. Most mature consumer-based companies might regard borrowings of two times trading profits as a tolerable upper limit. At the AA, Tuesday’s half-year results showed a net debt ratio of 6.7 times, unchanged on a year ago. | The short explanation is debt – too much of it. The AA arrived from the world of private equity, in this case CVC and Permira, and has continued the same aggressive financing model (with potential jackpots for executives, naturally) in the public arena. Most mature consumer-based companies might regard borrowings of two times trading profits as a tolerable upper limit. At the AA, Tuesday’s half-year results showed a net debt ratio of 6.7 times, unchanged on a year ago. |
| That’s fine (ish) only if you avoid potholes. But financial gearing also works in reverse, why is why the AA grumbled so loudly about changes in insurance taxes and the regulator’s demand for transparency on renewal quotes. Those events – hardly exceptional – had already helped to push shares back down from a high of 420p to the float price of 250p before Mackenzie’s exit. Now they’re at 157p as investors wonder where AA is going next. This is a company worth £1bn towing a £2.7bn caravan of debt. | That’s fine (ish) only if you avoid potholes. But financial gearing also works in reverse, why is why the AA grumbled so loudly about changes in insurance taxes and the regulator’s demand for transparency on renewal quotes. Those events – hardly exceptional – had already helped to push shares back down from a high of 420p to the float price of 250p before Mackenzie’s exit. Now they’re at 157p as investors wonder where AA is going next. This is a company worth £1bn towing a £2.7bn caravan of debt. |
| Breakwell will unveil the fruits of his review next year, but a focus is insurance. That seems sensible given that the AA has 3.3 million roadside members and only 616,000 car insurance policies. Rather than combine with an established insurer – there were brief talks with Hastings – the plan is for the AA to do more underwriting directly, which is where the real money is made. | Breakwell will unveil the fruits of his review next year, but a focus is insurance. That seems sensible given that the AA has 3.3 million roadside members and only 616,000 car insurance policies. Rather than combine with an established insurer – there were brief talks with Hastings – the plan is for the AA to do more underwriting directly, which is where the real money is made. |
| Fine, but how are you going to pay for it? Underwriting requires upfront capital, and the AA’s heavy annual interest payments, plus a deficit in its pension fund, don’t obviously leave much loose change. The roadside business does indeed generate lots of cash but even an extra £35m for IT hurts. Breakwell insists there are funds to invest, but the open question is how much. | Fine, but how are you going to pay for it? Underwriting requires upfront capital, and the AA’s heavy annual interest payments, plus a deficit in its pension fund, don’t obviously leave much loose change. The roadside business does indeed generate lots of cash but even an extra £35m for IT hurts. Breakwell insists there are funds to invest, but the open question is how much. |
| Investors can kick the tyres on the plan when it arrives. For the time being, the market’s judgment looks correct: the AA is a classic tale of a lovely business spoiled by financial games. The original private equity backers have an excuse of sorts – aggressive financing is what they do. It’s hard to understand why the big City funds agreed to follow the same sat-nav. Tolerating almost seven times leverage at a listed company that has been through the private equity’s wringer was asking for trouble. | Investors can kick the tyres on the plan when it arrives. For the time being, the market’s judgment looks correct: the AA is a classic tale of a lovely business spoiled by financial games. The original private equity backers have an excuse of sorts – aggressive financing is what they do. It’s hard to understand why the big City funds agreed to follow the same sat-nav. Tolerating almost seven times leverage at a listed company that has been through the private equity’s wringer was asking for trouble. |
| Equifax scores lowly on corporate governamce | Equifax scores lowly on corporate governamce |
| If you think UK directors get off lightly when calamity strikes, you can always rely on a US company to redefine the meaning of reward for failure. By rights, Richard Smith would have lost his job as chairman and chief executive of Equifax when the huge credit-scoring firm confessed a fortnight ago to a massive data breach that exposed the personal information of 143 million people. | If you think UK directors get off lightly when calamity strikes, you can always rely on a US company to redefine the meaning of reward for failure. By rights, Richard Smith would have lost his job as chairman and chief executive of Equifax when the huge credit-scoring firm confessed a fortnight ago to a massive data breach that exposed the personal information of 143 million people. |
| After all, you will struggle to promote yourself a “consumer advocate” if you can’t be trusted to protect the public’s sensitive information and then wait weeks to tell the world about one of the biggest cyber-raids seen in the US. As the share price tumbled, Smith somehow clung on. | After all, you will struggle to promote yourself a “consumer advocate” if you can’t be trusted to protect the public’s sensitive information and then wait weeks to tell the world about one of the biggest cyber-raids seen in the US. As the share price tumbled, Smith somehow clung on. |
| Now he’s gone, but what a send-off he received. Smith wasn’t sacked, he “retired” with expressions of “appreciation” from the board. The man himself said it had been an honour to serve. But, actually, it was more than an honour. He was paid $14.9m (£11m) last year and, by calling his departure a retirement, Equifax is presumably signalling that it doesn’t intend to claw back a dollar of his bonus. Governance is far from perfect in the UK, but a FTSE 100 firm would struggle to get away with such a brazen manoeuvre. | Now he’s gone, but what a send-off he received. Smith wasn’t sacked, he “retired” with expressions of “appreciation” from the board. The man himself said it had been an honour to serve. But, actually, it was more than an honour. He was paid $14.9m (£11m) last year and, by calling his departure a retirement, Equifax is presumably signalling that it doesn’t intend to claw back a dollar of his bonus. Governance is far from perfect in the UK, but a FTSE 100 firm would struggle to get away with such a brazen manoeuvre. |
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