“Ill seed has been sown, and so an ill crop will spring from it,” says a chieftain in ‘The Story of Burnt Njal’, one of Iceland’s greatest sagas. The modern UK over-50s firm Saga, which launched its IPO last week, would do well to heed the warnings found in its medieval namesake. The flotation will sow the seeds of its success for years to come.
For the 700,000 Saga customers that indicated interest in buying at least £1,000 of the firm’s shares, the IPO looks like a fantastic opportunity. (Those customers signed up after a targeted mailing campaign asking them to register their interest.) Customers will be given the opportunity to share in the success of the wide-ranging firm, and will receive a free share for every 20 they buy, alongside the opportunity to reap the rewards of Saga’s fast growth, if this continues after the IPO. The deal will take the company towards a modern and attractive form of mutualisation: customers as shareholders, shareholders as customers.
It will help the company and its owners, too: much of Saga’s business proposition is about tapping into the wealth of its older and often rich customers, and Charterhouse, Permira and CVC hope to share in those riches through the IPO as well. If the three private equity firms can tap into price-insensitive retail demand to guarantee interest and ramp up pricing, so they should.
But the lure of that exciting-looking idea could obscure a dangerous bind that leverages any success or failure for the company. If those shares do badly in the aftermarket, its investors and its customers — now one and the same set of people, in a step towards mutualisation — might hold it against the company.
Saga relies on the strength of its brand to sell its wide range of products, but if its image changes from discerning and helpful interest group to fast-moving rip-off merchants, that model will fall apart. That could lead to the company’s shares plunging even further, locking the company into a dangerous spiral.
That issue has its positive effects, too: if the retail investors make money off the flotation, Saga will become even more of a customer darling, while its customers will have even more disposable income to spend with them.
But retail investors are often more short-termist than they are made out to be. They see a strong aftermarket as good, but natural and unremarkable; even a modestly weak one can lead to torrents of upset and bad PR, as well as selling that will bring the value down further.
Another character in the Icelandic sagas warns to “Mind you don’t agree today to what you’ll regret tomorrow.”
Saga’s new retail investors are taking a bet, and could be handsomely rewarded for it, but Saga's owners should be aware of the vicious spiral of regret that could await them if the deal does not deliver aftermarket performance.