business by lindash


									BUSINESS                                     June 4, 2006, THE SUNDAY TIMES

Chief executive Tim Parker is turning round the business and driving through big job
cuts, reports Matthew Goodman

WHEN Damon Buffini turned up at his local church in Clapham, south London, a
fortnight ago, he and fellow worshippers were greeted by the rather arresting site of a
camel and a band of trade-union protesters.

For Buffini, the demonstration had particular significance. The protestors, from the
GMB, were handing out flyers featuring his mugshot.

As head of Permira, the private-equity firm, the union members hold Buffini partly
responsible for what they see as a brutal round of lay-offs at the AA, the motoring
organisation jointly acquired by the firm and rival CVC from Centrica in 2004 for
£1.75 billion.

The reason for the dromedary's presence was a reference to the biblical observation
that it is easier to thread a camel through the eye of a needle than for a rich man to
go to heaven.

For Tim Parker, chief executive of the A A and the man who has overseen a major
restructuring of the business, the protests are a wearisome distraction from the job in

In the 20 months he has been in charge, he has knocked the former mutual
organisation into rather good shape.

Profits, which were £93m in 2003, the last full year under Centrica, have more than
doubled to just over £200m in 2005 and are on course to grow 20% this year. The
number of jobs attended to by patrols is on the up, as is the percentage of cars that
are fixed al the roadside and don't have to be towed to a garage. And the retention
rate of members is also on the rise.
It has all come about a lot faster than anybody expected — Parker is a year ahead of
schedule, but ask him if that means the current owners are accelerating towards a
flotation, and he plays down talk of an impending exit.
The only new screens you might see the AA on any time soon are not in City dealing
rooms but in New Zealand, where a TV production company is talking about making
a children's show in the vein of Bob the Builder, provisionally called Patrolman Pete.

There's been nothing cartoon-like, however, about the changes Parker has
unleashed on the AA since taking over in September 2004. Perhaps the biggest shift
has been the big reduction in staffing levels. About 2,000 people have been laid off,
about a quarter of the workforce. These include many middle managers, but also
front-line workers such as call-centre staff and patrolmen.

While the cuts have been painful for all involved, Parker said they had to happen.
"When we came here, it felt a very inefficient organisation and there were very low
levels of productivity." he said. "Effectiveness among the patrols ranged from very
good to very poor. Membership was declining and the company had made a couple
of poorly calculated acquisitions. The management seemed more interested in
extending the brand rather than improving the core business."

Operations that were not contributing much or losing money, such as the service
centres and the vehicle-inspection arm, were sold off or closed down. And Parker —
known as a restructuring specialist after stints running Clarks, the shoe maker, and
Kwik-Fit, the car-repair chain — took his knife to the AA's cost base.

The patrol units were a particular issue, identified early on by CVC and Permira. A
minority would prefer to respond to as few jobs as possible. Many patrolmen were on
contracts that meant they would work only between 9am and 5pm. Monday to Friday
— not necessarily always the times that cars break down. New arrangements on
working hours were negotiated, while pay packages have been slanted to pay
patrolmen by the job, to encourage them to work.

The call centres also saw plenty of bloodletting, but Parker said it could have been a
lot worse. "We looked at the option of offshoring our call centres." he explained. "But
it was not the best route to go.
"I don't think members would have appreciated phoning in a moment of distress, and
having the call answered by someone several thousand miles away."

The price for keeping the call centres in Britain was that they had to become a lot
less costly, and the whole business has been streamlined with heavy job losses.

Alistair Maclean, national secretary of the AA Democratic Union, which represents
AA staff, said the vast majority of those who lost their jobs took voluntary redundancy
and received, in many cases, handsome payoffs.

"When Centrica owned it, they weren't willing to spend the money on redundancy
payments, even though they knew it had to be done. The new owners have spent
more than £100m on redundancy payments. It's never easy for someone in my
position to see people being made redundant but it had to be done." he said.

It is a different picture than that painted by the GMB, but neither Maclean nor Parker
are willing to discuss the union's anti-AA campaign. "I don't want to get into a
slanging match with them," said Parker.

But he is somewhat bemused by GMB accusations of asset-stripping. "The AA has
no assets to speak of," he said. "We occupy relatively few freehold properties; all our
vehicles are on operating leases. It's a business whose assets are almost entirely
goodwill |the brand]. All the investments we're making are coming from our own
cashflows. The businesses we disposed of were worth nothing — they were loss-

He also defended the level of debt at the AA, another key plank of the GMB

Borrowings at the membership organisation have risen to £1.8 billion, following a refi-
nancing in which CVC and Permira took out £500m.

Parker said: "Our interest payments are twice covered. What we are borrowing is
way below the market value of the business. By refinancing we've lowered our
borrowing costs considerably."

Parker is adamant that, while the AA has had to endure a large number of job cuts,
the money saved is being reinvested in the business.

The most striking example of this will be unveiled in the next few months with two
acquisitions, costing about £100m. Parker declined to reveal the identities of his
targets but said that one will be a smaller rival roadside-assistance business while
the other will be an insurance firm, to bolster the organisation's existing operation in
that market.

The amount of money being invested in marketing is also going up, from £ 14m in
2004 to £21 m this year. It seems to be paying off. Member retention rates have
climbed from about 81% to 85%.

"That might not sound very much but that's another 120.000 members per year." said
Parker. The AA's insurance business has recently broken through the 1m motor
policies barrier.
The group is also investing in a new fleet of vehicles for its patrolmen, which will see
AA vans fitted with towing equipment to reduce the need to rely on third-party
contractors to take broken-down cars to garages.

Given that the business seems to be thriving under private-equity ownership, the
obvious question is whether CVC and Permira will attempt to bring it back to the
stock market in the near future.

It would certainly command a significant premium to the price the two buyout firms
paid for it. They bought the business for 23 times historic earnings; applying the
same multiple to the business today gives a market value of £4.6 billion.

Parker said: "We haven't discussed an exit, we don't have any immediate plans, and
we are not in any special hurry." Other sources close to the company insist that CVC
and Permira would reap more value by sitting tight rather than going for the "quick
flip", as these swift exits are known in lever-aged-buyout circles.

The AA has changed a lot over the past two years, but the owners feel it could still go
up a couple of gears

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