Expect a turnaround at over-50s firm Saga, says Ian Taylor

News that US ‘activist’ hedge fund Elliott Management had acquired a stake in UK travel and insurance group Saga set pulses racing this week – not least among Saga executives.

Why? When Saga revealed Elliott had taken a 5% stake, business newspaper the Financial Times foresaw “a shake-up of the group”.

Saga sells to the over 50s, an attractive demographic when it comes to sales of travel and insurance.

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Yet the company has had a troubled year. It announced hefty losses in April, admitting price competition was hitting its insurance business.

Saga’s share value fell 40% on the day of the announcement and 60% in the first half of this year – pushing its equity value near to its net debt of £390 million.

It’s the insurance arm which has the problems despite contributing 90% of Saga profits the previous year.

Price comparison sites have been eating Saga’s lunch, encouraging its customers to switch insurance provider when the over-50s are normally seen as inherently more ‘loyal’ than younger age groups.

Elliott, typically, spots a business which looks undervalued, takes a stake and seeks to raise its share price before selling up.

That usually means intervening in some way, which is why it is termed an ‘activist’ fund. News of its stake nudged Saga’s share price up in anticipation.

The Financial Times quoted a Saga ‘top-10 shareholder’ who suggested: “There is a lot of inherent value within Saga, but UK domestic-facing equities are friendless. Perhaps this will bring a greater sense of urgency.”

UK domestic-facing equities appear ‘friendless’, presumably, because of uncertainty around Brexit.

Elliott may seek a change of management and strategy, a restructuring, a sale or a break-up of the business.

If the company were broken up, its parts would likely fetch more than the whole since a rival insurance company would be keen on having its insurance clients but less interested in its travellers.

Similarly, a travel business would not want the insurance business. But shorn of insurance, Saga Travel might interest a private equity buyer.

At any rate, that is the thinking and the reason Saga’s share price jumped 14% following the news.

The Financial Times noted: “Saga’s model no longer makes sense . . . with hardly any cross-selling opportunities for the travel arm.

“A trade buyer for insurance and a private equity buyer for travel – more comfortable with the debt required to buy cruise ships – would surely put more value on the goodwill.”

‘From price to value’

Saga reported a loss of £135 million for the 12 months to January. But its travel business made an underlying operating profit of £21 million, 2% up year on year.

Chief executive Lance Batchelor promised “a fundamental change to the group’s strategy” as he noted: “Saga has faced increasing challenges from the commoditisation of the markets in which we operate, especially in insurance.”

Primarily, this would involve “a new approach to insurance, moving from price to value”.

He argued: “What made the company successful was products specifically designed for our demographic, that were competitively priced and built great brand loyalty.”

Saga had lost its way, he suggested, by becoming “overly focused on the short term”.

Its travel arm had “maintained profitability, but parts of [Saga] tour operations remain under pressure”, Batchelor said,

He noted: “At a time when our target demographic market continues to grow overall, our volumes have declined.”

Saga’s strategy on travel would be to “move away from undifferentiated, low-value products such as short haul to higher value, more differentiated segments such as escorted tours, third-party cruises and river cruises”.

In line with this, Saga Travel launched a new cruise liner this month and has a second on order.

The trajectory of the business, the low share price and the fact that “the target demographic market continues to grow” will all have made it attractive to Elliott.

Whether Elliott will wholly reverse a “focus on the short term” is another matter. It will want results, although nothing is likely to happen immediately.

Typically, Elliott works behind the scenes. Matters may only break into the open if there is a boardroom opposition at Saga to what Elliott perceives as the way forward.

Meantime, Elliott may seek to increase its stake. The fund invests across sectors and markets but recently took over another well-known travel business, technology company Travelport.

The process of that acquisition may provide clues to the future for Saga.

Elliott was revealed to have built an 11.8% stake in Travelport early last year and was reported to be pushing the company to explore a sale.

Nine months later, just before Christmas, Travelport announced it was the subject of a $4.4-billion takeover bid by private equity firms Evergreen Coast Capital and Siris Capital Group.

Evergreen is private-equity affiliate of Elliott Management which focuses on technology investments. New York-based Siris also invests primarily in tech-related businesses in North America.

The deal was subsequently approved by Travelport shareholders and the company taken private.

Travelport announced a change at the top last week with longstanding president and chief executive Gordon Wilson standing down (with a big payoff) to be replaced by Greg Webb, senior vice president of technology provider Oracle Hospitality and previously vice chairman of rival GDS Sabre.

Expect changes at Saga over the coming 12 months.

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