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Last Updated: Friday, 8 June 2007, 05:44 GMT 06:44 UK
The AA: rescue or wrong turn?
By Rob Lemkin
BBC Money Programme

Has a private equity takeover been good or bad for the AA?

AA patrol
Job cuts were essential and inevitable the AA says

Since the private equity firm Permira helped take over the AA in 2004, about one third of its workforce of 10,000 have lost their jobs.

Former award-winning AA patrolman Steve Thompson is among several current and former AA staff who tell the Money Programme that private equity has, in their view, damaged the company they love.

"If anybody hears that private equity is taking over their company, beware of the signs," he says.

Some of the AA's staff were represented by the GMB trade union. Its officer Paul Maloney is critical of the management's approach during the job cuts. He describes it as "horrendous" and says it amounted to "corporate bullying".

The AA's chief executive, Tim Parker, installed by its private equity owners, strongly rejects the bullying claim and says the company had genuine performance issues that necessitated the restructure.

"They had not been addressed for many, many years and it was essential that we did that for the members."

Strong financial position

Apart from the AA, private equity takeovers have often resulted in radical job losses for the company in question.

Broken down car
Are customers left waiting longer on the left shoulder?

"It could be argued these are unproductive jobs, but that's rather harsh when looked at in a social context," says former chairman of Marks & Spencer, Paul Myners.

But Permira partner Charles Sherwood, one of the private equity owners at the AA, defends the practice, saying, "there are some businesses where you have to take an initial step backward before you can take a business forward".

"If they do not produce good value services for customers then they have no long term future and they will employ no-one," he says.

Mr Parker admits that last year "we could have done with slightly more patrols, and we learnt something from that".

But he maintains the AA's patrol force is now more effective than ever before.

In fact, he thinks the AA in its entirety is stronger than ever.

"We are a good example of a business which had a good business plan which has delivered improvement and sales and is now in a very strong financial position," he says.

Vulnerable company

The AA's current management says the company's earnings are now up by 120m a year.

Motorway traffic
The AA believes its business is flowing better now than before

It sounds like the company is doing brilliantly.

But then there's the small issue of debt. The private equity owners loaded the AA with 1.3bn of borrowed money during the takeover. This has since risen considerably.

Understanding how this works is the key to understanding the private equity buyout system.

Some 1.3bn of the AA's initial buyout of just less than 1.8bn came as loans arranged by Barclays Bank.

Former venture capitalist Peter Folkman argues the prudence behind this level of debt is dependent on the general health of the economy.

"If the company is making more profits, it can service the debt. That's fine," he reasons.

"If we get hard times then, undoubtedly, it'll make the AA much more vulnerable."

High debt levels

As private equity investors become bigger players in the UK economy - the 11bn buyout of Boots is set to be the largest ever in the UK - there is concern at very high levels at the size of the debt being piled on the companies that get taken over.

The Financial Services Authority has raised concerns that one day a private equity company might collapse under the weight of its own debt .

But at Permira, one of the AA's private equity owners, partner Charles Sherwood adamantly denies overloading this or any of their other companies with debt.

"It serves us no good at all to burden the company with more debt than it is capable of servicing in a sensible way," he insists.

The Money Programme: The AA: Rescue or wrong turn, Friday 8 June at 1900 BST on BBC Two.

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