Jefferies upgrades AA after takeover offer

Jefferies upped its rating on AA shares to ‘hold’ from ‘underperform’ on Tuesday as it hiked its price target to 35p form 5p based on the 35p a share cash offer from a consortium of TowerBrook Capital Partners and Warburg Pincus.

Still, Jefferies said the deal isn't done and risk-reward at the current share price is poor.

"If the bid fails, equity and debt raise risks are material," it said. The bank forecasts free cash flow of just £50m a year versus £2.6bn of net debt, and said debt costs are rising.

Jefferies said shareholders are likely to accept the offer but if they don’t, the shares would fall back towards the undisturbed level of around 20p.

"From there, additional equity 3-4x the resulting market cap (£125m) would be required," it said. "That could then see the banking facilities extended, the B notes resolved but leverage still at 6x net debt to EBITDA.

"We struggle to believe there is sufficient public market support for what is essentially another IPO."