Over 12 months ago I kicked off this conversation on AA (LON:AA.)


For anyone interested I want to kick of the conversation again. I hold and interested in counter opinion and detail...save me from myself ;)

I started looking at AA simply as I was trawling through Woodford's portfolio looking for stocks that may have been overly beaten up due to his holding in them and his deteriorating reputation. AA intrigued me and I was curious to gauge sentiment. Its obvious that its got more debt than is healthy....but look beyond that and what you have is a super brand that is almost unchallengeable in its position in the UK. 

The discussion lead me to believe that the AA was probably massively undervalued. Its an unstable proposition though as depends on a bunch of moving factors and how new CEO Simon Breakwell's changes work out.

There's so much debt placed on intangible brand that there is no other option than the debt guys need to back the business and support equity

Okay, okay! I know you cynics are sniggering at me now. What a ridiculous point of view...right?

There is a chance that equity in AA could be worthless as debt pressures weigh. I believe this is very unlikely even if the company struggles to repay debt as the debt holders have close to zero incentive to initiate demise of AA given that ultimately there is no asset value and just an intangible brand that generates revenue. Tarnish it and there's nothing left to pay the debts. 

Are the debt holders going to take over the running of the company? That's quite unlikely as whilst they can safeguard short term coupon repayments they need a decent business to keep the coupon repayments coming long term and some of the debt to be repaid. 

What about a hugely dilutive equity issuance? Its possible. Its not obvious its needed today but perhaps deterioration in revenues and margins could see it come in future? I think the odds are stacked against this course. The equity is already too little relative to debt to make it worthwhile. 

A private equity takeover for close to zero is the only plausible risk IMO. That would create quite a mess and the process of getting there…

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