Another day, another windfall, as the AA sells up and its members cash in

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The Independent Online
NEARLY FIVE million members of the Automobile Association are to receive windfall payments of pounds 240 each and the chance to renew their memberships at a discount, following yesterday's pounds 1.1bn takeover of the organisation by Centrica, the trading and supply arm of what was formerly British Gas.

While the deal holds the threat of thousands of job losses as the AA's call centre and back-office functions are merged with those of Centrica, it also adds to a stream of windfall payments which are expected to fuel a national consumer spending spree.

In addition to the one-off payment - worth the equivalent of between three and six years' free membership - AA members will be offered discounts on membership provided they sign up to take electricity from Centrica's supply business, British Gas Home Energy. Other perks will include discounts on gas fires and heating appliances and the installation of air conditioning and security systems.

Sir Brian Shaw, the chairman of the AA's governing committee, said it had taken the "momentous" decision because the AA would have lost ground to competitors had it kept its mutual status. He said the AA had considered a flotation but it would have taken up to two years to be sold as a public company.

Centrica has undertaken to maintain the AA name, its 3,600-strong fleet of patrol vans and its historic role as the voice of the motorist. Sir Michael Perry, the Centrica chairman, added that he would be switching his membership from the RAC to the AA immediately.

He was beaten to the switch by the thousands of carpetbaggers who, having joined the AA since news emerged that it was considering giving up its mutual status, will benefit from the windfall payments. As of midnight on Sunday, the cut-off point for eligibility, the AA estimated it had 4.6 million full members. They can expect their windfall in October, provided they vote in favour of the sale to Centrica at a special general meeting in August.

The effect on the economy of these and other windfalls will be closely watched by analysts. The payout from the AA is small compared with the windfall of free shares from building societies floating on the stockmarket two years ago. The Halifax alone put nearly 12 times that amount in the hands of its members, and total windfalls from mid-1996 to the end of 1997 amounted to about pounds 35bn.

However, the latest series of handouts from the AA and the RAC, which was sold to Lex Service earlier this year for pounds 437m together with the takeover of Scottish Widows and the Bradford & Bingley's decision to join the stock market as a bank, could have a bigger impact on the economy than the earlier wave.

Around three quarters of those earlier billions were saved, but experts think most of the current round of payouts could be spent straight away on things like holidays, clothes and even meals out, precisely because the amount each household receives will be relatively small. The effect of any windfall depends on when it occurs," said Michael Dicks, an economist at Lehman Brothers, the City investment bank. "House prices are soaring, people are cashing in anyway on high share prices, so these new windfalls could take the economy over the threshold into a mini-boom."

Latest official statistics suggest that consumer spending had already started to accelerate before any of the recent windfall payouts were announced. Consumer confidence is about its highest for a generation, thanks to very low mortgage rates and the lowest unemployment in two decades.

In addition there is some early evidence that investors are starting to cash in some of the gains they have made on the booming stockmarket, in a parallel to the late-1980s phenomenon of "equity withdrawal" from the housing market.

Even the limited boost to spending from the earlier windfalls played a part in the Bank of England's decisions to raise interest rates during 1997. If the new ones do feed into the current housing boom, there is some danger the same thing could happen again.

Luckily, inflation is well under control for the time being. It is more likely that the payouts will find their way into a harmless spending spree.

"Windfalls are generally spent on more expensive items like consumer electronics, holidays and furniture," said Leo Doyle, an economist at Dresdner Kleinwort Benson. Or perhaps, this time, on Millennium celebrations. The pleasure today's consumers will gain from the boost to their bank accounts reflects invisible savings made by previous generations. Mutual organisations like the AA and building societies built up cash reserves and thriving businesses owned by their members, most of whom did not know about the hidden wealth.

The change of ownership, or stockmarket listing, unlocks the wealth that had existed all along - the new owners have to buy the organisation from its millions of member-owners.

Privatisation in a sense paved the way for this demutualisation.

It introduced both the idea of changing the ownership of organisations as a means of running them more efficiently and the habit of shareholding by individual Sids.

Ironically, though, it was the failure of the Conservatives to deregulate the building societies more thoroughly in the mid-1980s that made some of their managers contemplate giving up mutual status in order to gain the same commercial freedoms as the banks.

Job fears, Business, page 17

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