The company was in the middle of a drastic turnaround plan when the coronavirus pandemic blew up in March. Since then, the business has been struggling to stay solvent. Meanwhile, management has been working flat out to restore investor confidence.
The company’s latest drastic plan involves a massive equity raising, which should strengthen its balance sheet. Today I’m going to explain why I think this is an excellent idea for the business.
The Saga share price on offer
Over the weekend it was reported that the UK over-50s travel and insurance specialist is planning to raise as much as £150m to strengthen its balance sheet.
This is a massive sum for a business worth just £153m.
However, investors are not going to be expected to foot the bill themselves. Saga’s former chief executive and chairman Roger De Haan is planning to put in £100m. He is also planning to come on board as the company’s non-executive chairman.
De Haan’s decision to come back to the business is good news for the Saga share price. He previously ran the company for two decades before selling it to a private equity house in 2004. Saga was sold for £1.3bn in 2004.
It seems De Haan isn’t the only investor who thinks the stock is undervalued. The company also revealed it had recently received an “unsolicited and highly conditional” 33p-a-share bid from a consortium of two US private equity groups.
These suitors have now walked away. Nevertheless, the fact that a 33p per share bid was in the pipeline tells me that the Saga share price is deeply undervalued at current levels. The fact that its former CEO is willing to put in £100m, also suggests that the market is underestimating the value of the business.
Stock market crash bargain
All of the above tells me that the Saga share price may be a stock market crash bargain. The fact that private equity companies were willing to pay 100% more than the current share price also suggests that the stock offers a wide margin of safety at current levels.
As such, I think the stock could be a great addition to a diversified portfolio today. The Saga brand continues to be well known and respected in the UK. This gives the company a competitive advantage, which should help drive its recovery in the years ahead.
At the same time, the latest fundraising should remove any immediate threat of bankruptcy for the group.
Therefore, with a potential upside of as much as 100% on offer and limited downside, investors could see high total returns from buying the Saga share prices as part of a diversified portfolio at current levels.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.