The AA has agreed to a £219m takeover deal that is expected to fully safeguard existing employment rights of the management and employees, including pension rights.

The acquisition would see private equity groups, Towerbrook Funds and Warburg Pincus, take control of the business via a consortium, and is expected to become effective during the first quarter of 2021.

The group confirmed that it had held “constructive discussions” with the trustee of the AA UK pension scheme and reached an agreement, subject to completion of trustee confirmatory due diligence, on the approach to funding and valuations during the next five years.

The memorandum of understanding agreed with the trustee has outlined a number of conditions relating to the pension scheme, which will be in place for a period of five years from the date of signing, 24 November 2020.

In particular, except where pre-agreed circumstances apply, the agreement confirmed that there will be no changes to the current contributions payable under existing schedules of contributions.

However, it clarified that where pre-agreed circumstances apply, there will be good faith discussions and agreement about any further cash contributions required beyond the five-year term.

Under the terms, it was also agreed that, in the absence of a material adverse event or request, the trustee will not bring forward the AA UK’s next actuarial valuation, expected to be as at 31 March 2022, and that agreed actuarial assumptions will be used.

If any changes are required to the actuarial assumptions, these will not, where possible, overall increase the AA UK's technical provisions.

Furthermore, if required to increase by law, the trustee has agreed to work in good faith and collaboratively with AA UK's principal employer to seek its agreement to revising the technical provisions appropriately.

Certain assurances were also given to the trustee concerning the AA Group’s indebtedness and future payments dividends and monitoring fees.

The group clarified however, that the funding plan has been agreed with the AA’s pension trustee predicated on the AA group maintaining its current S&P rating.

Considering this, it warned that a downgrade or a deterioration in its financial profile could lead to a renegotiation of these arrangements, with potential further negative consequences for the AA's free cash flow.

In the announcement, AA directors stated that the group has been labouring under too much debt for a long period of time, arguing that this is no longer sustainable or in the best interests of shareholders, including members of its pension scheme.

As such, the directors have highlighted the acquisition as the best option available to the AA and its shareholders, providing certain cash value for AA shareholders at an approximately 40 per cent premium to the undisturbed market price.

An injection of £378m of new equity to reduce indebtedness is also expected alongside this.

The group argued that this reduction in debt would enable the AA to generate more cash each year to reduce debt further over time and set the AA on a “positive deleveraging trajectory” over the medium term.

The announcement also emphasised that AA directors had been “very mindful” of the importance of the AA’s responsibly to the AA pension scheme, which has £2.8bn of liabilities.

The news follows the closure of the group's defined benefit and career average revalued earnings section of the scheme in April, following a consultation with affected employees which agreed plans for an “enhanced” defined contribution scheme.

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