UPDATE 2-UK motor firm AA Group makes weak stock market debut

Mon Jun 23, 2014 5:13am EDT

(Adds share price, executive comment)

By Freya Berry and Clare Hutchison

LONDON, June 23 (Reuters) - Shares in AA Group fell on Monday after the UK motoring organisation joined the London stock market, just a month after its sister company Saga failed to impress investors in its own debut.

The AA, best known for its roadside recovery services, said it had priced its initial public offering (IPO) at 250 pence a share to raise gross proceeds of 1.4 billion pounds ($2.4 billion). Most of the money will go to its private equity owners.

Shares opened at 244 pence each and were last down 2.6 percent in conditional trading.

More UK companies are seeking to list on the London stock market this year and investors have become increasingly choosy about which companies they back and the prices they are willing to pay in recent weeks.

Proceeds from UK IPOs more than tripled in the year to date with $8.8 billion raised across 33 listings, Thomson Reuters data showed last month.

AA's share sale follows last month's flotation of holidays-to-insurance company Saga, which its private equity owners merged with the AA in 2007 under parent vehicle Acromas.

Saga shares are trading at 170 pence, 8 percent below the price they were sold at in the IPO.

Bankers pointed to other private equity-backed companies that have struggled after their market debuts. Spanish travel agency eDreams Odigeo, part-owned by Permira and Ardian, has lost almost 40 percent since its April listing, while Charterhouse's Card Factory has lost nearly 8 percent.

Conditional trading allows City firms to buy and sell shares to stabilize the price before launching on public markets.

DEBT REDUCTION

AA's share sale enabled its private equity owners Permira , Charterhouse and CVC to sell their entire shareholding, after failing to sell anything with the Saga listing.

The private equity firms sold their stakes to a management buy-in team, led by Bob Mackenzie, a former boss of car insurer Green Flag who is to become AA's executive chairman, backed by institutional investors.

"London is still a fantastic place to raise money," Mackenzie said.

"We saw 10 cornerstone investors and then we felt we had enough to make a credible offer."

AA received commitments of over 930 million pounds from those investors, which include Aviva, BlackRock Inc. and Legal & General.

They will take on AA's roughly 3 billion pounds of debt.

"The focus is on deleveraging the business," said AA Executive Director Martin Clarke. The company will use 185 million pounds of the IPO proceeds, raised by the sale of new shares, to help pay down debt.

"The business is highly cash-generative and so will naturally delever over time."

The AA is the UK's biggest motoring organisation and roadside recovery service, with around 16 million customers. It also offers motor and home insurance and a driving school.

The firm, which says it rescues a broken-down vehicle every nine seconds, had earnings before interest, tax, depreciation and amortisation (EBITDA) of 422.8 million pounds in the year to Jan. 30.

Pretax profit was 214.6 million, down from 312.7 million a year earlier because of an increase in finance costs.

The placement was brokered by Cenkos and advised by Greenhill and Deutsche Bank.

($1 = 0.5876 British Pounds) (Editing by Erica Billingham)