The AA's in a potential bidding war/takeover. Could get exciting. I'm long and wrong to date...so perhaps just ignore me....
I took a full position in Aa (LON:AA.) at 50p 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 believed I could see a manageable debt deleveraging story to >10x over 7 years. That vision has been struggling to raise its head since yields in general backed up last year and then Covid crapped from a height to.
Its a super reflexive situation. Price deteriorates and everything looks multiples worse. Price improves and its looks multiples better.
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 Diageo (LON:DGE) -> 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)
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…
