Sharks sink teeth into RAC
Staff get ‘1% wage rise as bosses’ deals soar by 25%’ ++ £400m paid in dividends while debt hits £1.4bn ++ And who is in charge? Private equity fat cats who preyed on Debenhams
THE RAC is facing what would be its first strike after offering staff a ‘derisory’ 1 per cent pay rise.
Executive directors at the private equityowned firm however are understood to have awarded themselves a 25 per cent hike.
The salary of the highest-paid director rose even more – by 27 per cent.
The owners, CVC Capital and Singaporean wealth fund GIC, are thought to be paying themselves a £44million dividend for last year.
Over the previous four years, they have extracted more than £400million, equal to one and a half times the operating profit.
CVC previously co-owned the AA – a rival motoring operation brought to the brink of collapse after it was loaded with huge debts and paid out massive dividends.
Lord Sikka, a Labour peer and accountant, described the size of the dividends extracted from the RAC as ‘worrying’, adding: ‘It’s an absolute disgrace.’
Nick Hood, an insolvency expert, said the strategy pursued by the RAC’s owners was risky in terms of debt levels and payouts.
He added: ‘The thing about the private equity model is it’s absolutely fine in good times, providing the business is profitable and cash generative. When you end up in any serious downturn, that structure is highly dangerous.’
CVC is one of the three former private equity co-owners of Debenhams, who piled it with debt, pocketing £1.2billion in dividends and selling store freeholds. Debt and soaring rent bills were major factors in the department store chain’s eventual demise.
And the RAC’s chairman is Rob Templeman, who was installed as chief executive of Debenhams by its one-time private equity owners. The high street chain, once one of Britain’s great retail institutions, closed its doors for the final time this month.
Breakdown firms such as the RAC are attractive to private equity outfits because of the ‘goodwill’ they have built up. This covers factors such as a loyal customer base or brand reputation and – in the case of the RAC – its goodwill is estimated to be worth £2billion.
The Unite trade union has called the 1 per cent pay offer at the RAC ‘derisory’. It comes even when annual staffing costs have fallen 3 per cent in 12 months through natural wastage and despite crews working through the pandemic at risk to their health.
Talks are taking place between management and Unite to thrash out an improved deal but, if they fail, ‘all options’ are said to be on the table including industrial action.
Neither the RAC nor the union was able to point to a previous example of a strike in the institution’s 124-year history. Unite has voiced concerns about rising debt levels and over how much money is being extracted from the RAC in dividends.
Analysis of the accounts for 20162019 shows that while operating profit was £283million, £446million was extracted in dividends. Public companies generally pay out less. Bank debt at the RAC rose over the same period, from £1.1billion to £1.4billion. Despite the pandemic, the breakdown firm’s operating profit soared to £126million in 2020, up from £101million in 2019.
A source close to Unite said: ‘Our concern at the RAC would be that asset stripping and loading a company with unmanageable debt is
‘The alarm bells will ring’
ultimately a road to disaster. We monitor the previous history and track record of investors – and the alarm bells will ring if you compare what’s happening in RAC to what happened in the AA.’
The RAC was owned by US private equity firm Carlyle Group before being taken over by CVC and GIC in late 2015. An RAC spokesman said: ‘Unite and the RAC enjoy a good working relationship built up over many years and there’s no prospect of any change to that.
‘We are both confident of a mutually acceptable outcome.
‘The RAC has delivered nine years of growth, with profits up over £140million, five million more new members, record membership retention rates and an ‘excellent’ Trustpilot rating. Over the last few years, the growth in market share and revenues has led to over 300 new colleagues joining.’
The AA’s near-demise was averted by another private equity takeover last year when it was valued at just £219million, against debts of £2.65billion. Its share price had fallen from 250p in 2014 to a low of just 15p.
Back in 2003, the AA – then part of Centrica – was a highly profitable, award-winning business with surging customer numbers. Overall profits had jumped by 27 per cent in a year to £93million.
Unions believe the company’s changing fortunes are down to its ownership in the intervening years by ‘marauding financial predators’.
CVC Capital and Permira bought the firm in 2004. They are thought to have paid only £500million toward the takeover, while the remaining £1.25billion of the purchase price was debt loaded on to the AA’s books.
Tim Parker was installed as chief executive and was nicknamed the ‘Prince of Darkness’ for his role in slashing jobs.
He is chairman of the Post Office – under fire for its treatment of staff wrongly accused of fraud – but remains an adviser to CVC.
Some 3,400 of the AA’s 10,000 staff were made redundant in ‘efficiency savings’. Services were also pared back, including the axing of overnight patrols.
Meanwhile, £500million in dividends was paid to the private equity owners in the three years to 2007.
In a House of Commons motion that year, MPs accused CVC and Permira of ‘blatant asset stripping’ at the breakdown firm – a mutual owned by its members until 1999.
Further debt was piled on to the books from a later merger with Saga – owned by another private equity firm, Charterhouse. Combined borrowing at the AA and Saga increased to nearly £5billion, funding a £2billion windfall for private equity.