Saga looks to raise £550m in float

SAGA, the over-50s lifestyle group, yesterday confirmed its widely-trailed plans to raise £550m in a London Stock Exchange listing, reports The Telegraph.

However, the company’s attempt to boost its valuation by pushing for a consumer services sector description has sparked a fresh row in the City over flotation practices.

Saga, which makes around 70pc of its earnings through its motor and home insurance offering, has argued that it should not be included in the FTSE’s insurance sector of companies, but instead in the specialised consumer services sub-sector.

In doing so, the company, which unashamedly focuses on the “grey pound”, joins ranks with funeral service provider, Dignity, as the only other company in the sub-sector.

Fund managers have argued it is a cynical move to use the higher valuations of consumer companies to achieve a higher rating than it should deserve. Alongside its insurance peers Saga would be deemed expensive, one City source added.

“It’s got to be Insurance as that is where the vast majority of the profits come from” Andy Brough, fund manager at City institution Schroders said.

However, sources close to Saga said there was no one natural comparison for the travel to insurance business and instead it should be compared to consumer companies with equally strong brands Burberry , Merlin or Unilever as well as financial peers Experian, Hargreaves or St James’ Place.

The fund managers have in turn been accused by bankers of trying to pressure the company to lower the price of its IPO and grab shares “on the cheap”.

Saga’s flotation was the “worst kept secret”, executive chairman Andrew Goodsell admitted. However, it should not be ranked alongside the recent questionable technology flotations whose valuations raised eyebrows.

“Saga is a very different … It is not like some of these Johnny-come-lately businesses; We have been a cash generative, sustainable business that does real things and produces real things for its customers for the past 60 years”, Mr Goodsell said.

Over 700,000 Saga customers have already registered their interest to take part in Saga’s retail offering. Individual investors and employees are eligible for one free share for every 20 shares they buy.

Saga’s customer base accounts for 60pc of the UK’s ABC1 population. As a result, Andrew Goodsell said customers were likely to want to invest larger sums than the £1,000 minimum.

Because of the company’s status as one of the biggest providers for the retired community, it is also expected to enjoy a boost from an increased demand from savers navigating the UK’s new pension systems.

The Budget unveiled a shock radical shake-up of the industry which will mean from April 2015, savers will be given total freedom over how they withdraw pension money.

There were initial fears that a scrapping of annuities could mean pensioners blowin ghtier savings pot on extravagant purchases, but the overwhelming feedback has been that this bracket of society is the most cautious with their finances.

Such is the weight of Saga’s customer in bagging the so-called “grey vote” that the Prime Minister has met with Saga’s customers to explain the new rules, it was revealed.

“David Cameron phoned us up to ask if he could talk to a group of our customers on the pension inheritance tax reforms,” Mr Goodsell said. “Its an important topic for our demographic”.

Mr Goodsell said that the public market was the “natural home” for Saga given consumer’s trust in the brand. Which begs the question why did private equity embark on the £6.2bn debt-driven merger of the company and roadside recovery group The AA in the first place?

“I think it was absolutely the right decision at the time. We overlaid Saga’s best practices on to The AA. Since being in the Acromas stable the AA has significantly improved systems, increased the number of patrol units and entered into the home emergency market.

Mr Goodsell said that The AA and Saga were now in a position to be run as two separate businesses.

Mr Goodsell confirmed that an exit was being considered for The AA but no decision had been taken on whether it should be a float or a sale. It has recently been reported that mid-tier broker and investment house Cenkos had approached Acromas’ private equity owners , to support an imminent flotation of the AA.

“Since the AA refinanced last year we have had approaches from a number of businesses, Cenkos was just one of them”. We have not made a decision. It is thought that all sides will wait for Saga to begin trading, thought to be by the end of May, before pursuing options for the AA.

Saga’s £2.2bn listing is the next step in the unpicking of Acromas, which was formed in 2007 when private equity houses Charterhouse, Permira and CVC merged the car rescue company AA with Saga in a £6.2bn deal.

The private equity groups are intending to sell down their stakes to achieve a free float of at least 25pc to comply with UK listing rules. The company said that the net proceeds of around £550m will be used to reduce net debt to £700m immediately after listing.

Saga has said that it intends to pay an initial dividend payout of approximately 40pc to 50pc of the group’s net income. The company reported £1.2bn of underlying revenues for the year to 31 January 2014 and underlying EBITDA of £222.4m.

Saga has recruited former Domino’s Pizza boss Lance Batchelor as its chief executive while adding Philip Green of United Utilites, former Bupa chief Ray King, Royal Mail exec Orna Ni-Chionna, Diageo’s human resources director Gareth Williams to its board.