Shares in over-50s insurance and cruise-line operator Saga (SAGA) jumped 5% to 45p on news that US activist investor Elliott Advisors has taken a 5.1% stake in the business.
Elliott is well known for pushing for change in companies including Whitbread (WTB), where it argued for the break-up of the company, resulting in the sale of Costa to Coca-Cola, and GKN which was ultimately bought by Melrose (MRO).
The news will be warmly welcomed by Saga investors after the shares lost nearly 60% this year following two profit warnings and the departure of its chief executive.
A spokeswoman for Saga said the firm has ‘good and open relations with all of our shareholders and we expect to be in contact with Elliott shortly’.
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In April the company cut its dividend and announced a change in strategy after warning that pre-tax profits for this financial year would be below forecasts.
It blamed the miss on lower margins in its insurance business due to higher distribution costs and claims inflation, and proposed a new focus on direct selling and higher-value products.
Last month it said that the new insurance strategy was showing ‘good early progress’ but that the tour operations were dragging down group performance due to tough competition and a slump in bookings.
One of the concerns around Saga is its considerable net debt, which is forecast to rise to nearly four times earnings before interest, taxes, depreciation and amortisation (EBITDA) this year and more like five times EBITDA next year.
Typically a multiple of one to two times EBITDA is considered sustainable for most companies, with alarm bells ringing once the ratio gets towards three times.
Given Elliott’s previous form in pushing for break-ups, and the lack of obvious synergies between Saga’s insurance and cruise/tour businesses, we would not be surprised if it argues for a spin-off or sale of the latter - together with a portion of the debt - and a focus on the former together with some form of capital return to shareholders and an increased dividend.
