The decision to sell the AA was prompted by Centrica’s need to invest in developing its energy position. This will primarily involve buying generation assets to deal with long term changes affecting the European wholesale market. The company is also keen to fund the expansion of its multi-product service-oriented model in foreign markets (it already has interests in North America, Belgium and Spain).
Therefore, although the AA was a highly profitable business in its own right, the decision to sell it off was not a difficult one to make. It did not present Centrica with a neat strategic fit as roadside assistance was not central to its core home services proposition. Furthermore, the opportunity to cross-sell products and services between both customer bases, mooted at the time of acquisition, was not realized.
Back to basics: a core multi-service strategy
So what does the future hold for Centrica’s other main acquisition, One.Tel? The decision to sell the AA should not be viewed as a wholesale abandonment of its multi-product, service-oriented model. Centrica is still very much committed to the development of its home services proposition. Its home services insurance business continues to grow with 6.9 million product relationships serving 3.5 million customers. Furthermore, it is investing heavily in its systems infrastructure (Jupiter, its CRM system, is costing it GBP400 million) to ensure that its cross-selling potential is fully realized.
Unlike road services, telecoms comprise a more important element of Centrica’s home services proposition. According to Centrica, a customer taking telecoms is 25% less likely to churn than a customer taking dual fuel. However, there is concern that One.Tel does not fit into the high value proposition that Centrica is trying to develop. One.Tel has built its brand around being a low cost, long distance call provider for customers both at home and abroad.
Centrica already operates a telecoms business through British Gas Communications. Although One.Tel is more closely integrated with the Centrica core proposition than the AA was (its products are marketed on the House.co.uk portal) its attempts at cross-selling have been limited, with customers remaining on different systems.
Centrica is waiting for the right offer
Centrica’s decision to sell the AA before One.Tel makes good business sense. The AA represents an attractive acquisition for potential buyers as it is a large and profitable market leading business in its own right. With bids likely to come in at around the GBP1.5 billion mark, Centrica will be able to establish a sizeable war chest for the advancement of its core energy business whilst stabilizing its wholesale position.
Centrica acquired One.Tel for GBP58 million in 2001 and it now represents a GBP178 million business. This in itself does not mean that One.Tel is likely to remain a Centrica subsidiary in the longer term. Although telecoms seems sure to remain an important product offering for Centrica, One.Tel does not offer either a strategic or systems fit. The type of high value customers that Centrica is looking to attract and make money from can already be serviced by the British Gas Communications business. Therefore, it would come as no surprise if One.Tel, like Goldfish and the AA, were sold. However, Centrica will only sell when the time is right and a suitable buyer has been identified.
