Odd couple aim to bring back AA’s golden age
BOB Mackenzie and Martin Clarke could be the City’s answer to The Odd Couple. London-based Clarke, the Labour party member and former private equity chief once nicknamed ‘the Sledgehammer’ for his no-nonsense approach, is known for deals in the fashion world including Italian designer Valentino and clothing chain New Look.
Meanwhile, Mackenzie, a fishing fan who lives in Coventry, is a bit of a roadside addict – he had been ‘lusting after’ the AA since 2007 and has previously run the NCP car park business and roadside services firm Green Flag.
Mackenzie, the AA’s Tory-leaning executive chairman, would be happy if Britain left the EU, while chief financial officer Clarke thinks it’s better if Britain keeps a seat at the table in Europe.
They don’t fit the Jack Lemmon and Walter Matthau characterisations in the Hollywood black comedy in every way, but opposites appear to attract.
Despite their differences, the pair are united when it comes to the AA. Sitting stern faced, suited and solemn in their new board room in Covent Garden, they come alive when chatting about the growth that they see possible for the AA such as driving tests and insurance.
The pair engineered the AA’s accelerated float – the technical term for the unusual fast-track listing process that they completed. The AA was owned by private equity-backed Acromas, which had tried to merge it with over 50s insurance and services Saga before deciding to list both firms separately.
Mackenzie credits Clarke as the man behind the plan. He explains: ‘Martin retired from Permira and decided to go off and look at buying businesses in January 2013… We started looking at propositions. We knew AA would have to be sold. In the summer they rather conveniently raised £3.3bn of debt so we saw the prospectus. We were able to build a detailed model.’
After going to sovereign wealth funds with no luck Clarke had the idea that Mackenzie should see his public-company investor contacts. ‘I thought this was a bloody stupid idea but I went anyway,’ Mackenzie says.
CLARKE was proved right. Mackenzie started with star fund manager Neil Wood-food then built up 10 ‘cornerstone’ investors and secured £930m of investment in advance of the float to buy out Acromas.
Rival RAC revealed its plans to float so Clarke and Mackenzie speeded up their plan and took six days to raise the rest of what was needed to float in June 2014.
They bought out Acromas, which is backed by funds from Charterhouse Capital Partners, CVC Capital Partners and Permira, and listed the AA on the London Stock Exchange with the help of broker Cenkos Securities. Shares listed at 250p each, valuing the business at £1.4bn and it raised £185m.
It wasn’t a clear road, however. AA’s £3.3bn debt mountain was a major issue. Clarke explains: ‘ We had to convince investors that the leverage was manageable.’ The first thing they did as a listed company was sort out the expensive debt – particularly the crippling payment-in-kind notes.
By refinancing they reduced the annual cash interest cost by more than £45m. Criticism of private equity owned businesses usually run along the lines of a lack of investment and massive borrowings. This rang true for the AA, whose IT and office systems had not changed for decades. As Mac- kenzie repeats often: ‘It was very, very underinvested.’ The blame put on its former owners – which include Clarke’s old shop Permira – leaves Clarke looking like a hypocrite. He tries his best to defend the situation and adds: ‘The timing didn’t work. It became about managing debt and paying that. They may have done more but were prisoners of debt.’
The AA is still paying off this debt, which is now £2.8bn. The mountain of loans led to a one-off refinancing charge of £87.4m and it revealed earlier this week that it made a half-year loss of £63.6m, down from a £10.2m profit last year. But by reducing the debt repayments it has been able to pay a half-year dividend of 3.5p a share.
The self-styled ‘fourth emergency service’ is 110 years old and according to Mackenzie many of its practices under the old management were outdated. He says the company was sending out 35million letters a year and customers who have signed up online then have to renew by post with documents that contain 36 telephone numbers. New systems, which will be ready by July, will allow all its databases to work together. It has new sales teams to help it sell more packages to members and has hired tech whizz kids to keep it abreast of the latest systems – in an attempt to turn it into the UK’s ‘pre-eminent’ motoring services organisation.
Although it is still based in Basingstoke, Hampshire, last year the AA opened its shiny new Covent Garden office.
There had been no advertising in a decade so a new advertising campaign hit the TV screens.
One thing that didn’t need changing was its patrol force which Mackenzie describes as ‘excellent’. The patrol men also had a top-rated Bosch technical system which needed no improvement.
Management’s relations with the patrol team are said to be far improved on a few years ago.
When private equity owned the AA it was accused of asset stripping by the GMB union and Permira’s Damon Buffini was targeted.
But Mackenzie said its relationship with the Independent Democratic Union, the only union the AA recognises, are now good.
The pair believe that there are still plenty of opportunities to expand. They could certainly do with improvement – revenue fell 1.4pc to £484.6m in the six-month period to the end of July.
New avenues include a joint venture in India and Clarke wants to do further tie-ups with other membership organisations around the world. Another expansion route is finance such as credit cards, loans and mortgages and it agreed a tenyear partnership deal with Bank of Ireland earlier this year to offer these services.
OPPORTUNITIES exist for its driving services division too. Its half-year results showed the business is struggling, with driving instructors becoming selfemployed and a fall in police referrals for its services.
But Clarke believes there are lots of ways it can sort this out – including offering incentives to tempt more driving instructors to sign up.
Another key focus is halting the decline in membership numbers.
Despite the losses in the first-half, roadside assistance revenue was up 2.1pc to £359.1m. Retention is up one percentage point compared with last year and while personal members declined 3.9pc year-onyear to 3.7m, the second quarter declined by only 0.3pc compared with the first quarter.
There are plenty of bumps in the road, not least regulation changes affecting insurance tax and holiday pay.
Another issue could be the Volkswagen scandal. The AA has been increasing its business customers, which were up 4.7pc in the first half to 10m, and in June 2014 won a contract with VW Group.
But it isn’t worried about any fallout, saying that VW’s meltdown ‘does not affect our business relationship with them as our contract is based around breakdown assistance’ and VW’s problems will not affect the safety or breakdown potential of its cars.
This odd couple might have differing views on Britain, the EU and politics in general, but they are both backing the AA to return to its former glory.