An uncertain road ahead for RAC

What’s next for RAC following Aviva’s plans to sell the business?

The big question will be over who the bidders for RAC are and what that will mean. Private equity firms are the most likely suspects, and already some of the big boys have been touted as potential candidates, including Charterhouse, CVC, Cinven and Apax.

The modus operandi of any private equity firm is two-fold: to cut costs and boost growth in order to maximise the eventual sell-on, typically within three to five years.

A smaller fleet?

Cutting costs would typically involve staff redundancies, office closures and a reduction in expenses. For RAC, as a purely speculative example, that might involve delaying the purchase of new breakdown vehicles or perhaps reducing the size of the fleet, especially if maintenance costs are expensive.

The big question for private equity, or whoever the eventual buyer is, is how to boost revenue when even an experienced management at Aviva couldn’t get the best out of the RAC.

Spin off the insurance arm?

One possible scenario is that the buyer may decide to spin off RAC's insurance arm. The cross-selling dream never came off for Aviva, and it is unlikely to for the new purchaser.

That insurance sale money could be ploughed back into the breakdown business, to acquire new customers through beefed-up sales and marketing teams.

A sold-off insurance arm would quite possibly fall back into the hands of a trade player within the insurance industry.

At the moment, all these scenarios are very speculative, as the sale process is at such an early stage.

The waiting process

Aviva still has the option to keep RAC, although the much more likely outcome is that there will be a few weeks, and possibly even months, before an information memorandum outlining the details of RAC is sent to prospective bidders.

For Aviva, the decision to sell RAC will largely be seen as a positive step in group chief executive Andrew Moss's strategy of disposing of non-core assets.

The RAC staff are unlikely to be surprised by the decision, having watched a standalone management team being created over the last six months. For them it’s a new, but not unexpected, chapter.