Published: 22/4/ 2022
Saga – A prime example of how a management team with no skin in the game can ruin a fantastic business.
I’ve followed Saga for many years and as a shareholder with more skin in the game than the suits running it, I have a strong opinion on the way it’s being managed. Recently I have seen a systematic destruction of value. So let me offer some advice to a company I know well.
I wasn’t surprised to see Saga has asked its banks for a repayment holiday on loans made to its cruise ship business. That will buy management some time, but I am not convinced that more time is going to salvage Saga’s cruise operation.
I believe Saga should close down the cruise business immediately to concentrate on salvaging other parts of the company that are worth saving. I know it’s tough to shut a business but this is a time for drastic action to be taken in the interest of the Saga business as a whole.
It’s my understanding that Saga has around £700m plus of debt on its cruise ships and additional group debt of around £450m in the core business. Management has said each of its two new ships will generate £40m of EBITDA. But, according to the industry insiders I’ve spoken to, that is a highly optimistic assumption. In the current environment, rather than generating profit, they may well have a negative financial impact on the group.
Reuters recently reported Saga is taking on further debt to add to its existing £450m. The management team should be clear about whether they are taking on core debt to support the cruise business. If so, do they have cross guarantees from the cruise business to the group? That seems unlikely to me, because of the regulatory issues it would raise over liquidity.
I’ve admired Saga in the past and it has carved out a unique space in the over 50s market. But the truth is it’s failing to capitalise on what should be a dominant position. Its figures suggest it only sells an average of 1.2 products per person, which shows how ineffective the cross-selling and cross-marketing strategies have been.
That number shows the business strategy is just not working. Saga’s over 50s play is clearly not resonating with the younger end of this demographic, but they do have a loyal, older, customer base. There is no doubt at all they should focus exclusively on that market. The key strategic question is what should they be selling them?
From a purely commercial standpoint I believe the management are about to make a huge mistake. They should shut the cruise business and focus on the parts of the business that are making money – cauterising the wound to ensure the rest of the company remains healthy. They are probably fearful of brand damage should they put it into administration, but consumers will understand that cruise operators are facing huge issues. There is no better time to get rid of it or if possible get someone who will take it off their hands for nothing.
Time for tough decisions
The cross marketing strategy is failing. Cruise is a separate business and it is one that is dragging the rest of the company down with it. The financial facts bear the argument out. The company has £1.2bn of debt, and £90m of profit, with nearly all of the profit generated by the insurance business. In business, as in life, the difficult decisions are often the right ones.
Selling or closing the cruise ship operation would leave Saga with £450m of debt and around £90m of profit – immediately strengthening the balance sheet.
In fact, cutting the cruise business adrift would lead to cost savings, meaning profits could increase overnight to £100m or more. Even with £500m of debt (including new borrowing), that is sustainable and gives Saga a base to build on.
The truth is management – unlike shareholders – aren’t putting their own money on the line. If they were, they might take the ruthless decisions needed to give Saga a chance of survival.
I’m always prepared to be proved wrong, but my bet is that ship has already sailed.
