AA - Another step towards take-out bid

All,

Please find our unchanged analysis here.

We remain 5% of NAV long the B notes and this morning’s statement confirms our thesis that any bid will be subject to the injection of fresh cash to deleverage the AA structure. We remain confident that a formal bid will materialise, but we acknowledge the process is definitely slower than we expected.

The AA shareholder register is interesting in relation to the voting process on any formal bid. The largest shareholder, Albert Bridge appears not to be restricted, having continued to buy very small amounts over the last couple of weeks. They have increased their stake to 20% and previous comments from them would indicate they would not be supportive of a bid at the indicative price.

The next two names on the shareholder register, Davidson Kempner at 15% and Cleveland at 10% could possibly roll their equity stake into the Towerbrook/Warburg Pincus bid. It has been rumoured that DK have sought to participate in any private equity bid. The announcement acknowledges this option a possibility. If this is the case, then it is unlikely that these holders would vote against a proposed deal.

In conclusion, we fully expect a formal bid to materialise and given the statement referred to an injection of cash to deleverage, we remain comfortable with our position in the B notes.

The announcement was made on the back of press speculation over the weekend and confirms that the Board have received a non-binding proposal for the share capital at 35p. The Board have indicated their willingness to accept any formal offer at this price. The current proposal includes a commitment to invest a further £380m to facilitate a debt reduction. The announcement was made with the agreement of the Consortium.

Happy to discuss.

Tomás

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