Centrica puts the AA up for £1.5bn sale to focus on energy

The Automobile Association, the historic car insurance and breakdown business, is up for sale with a price tag of around £1.5bn. Its parent company, Centrica - which also owns British Gas - has decided to refocus on the energy market.

The Automobile Association, the historic car insurance and breakdown business, is up for sale with a price tag of around £1.5bn. Its parent company, Centrica - which also owns British Gas - has decided to refocus on the energy market.

Bankers are believed to have begun an auction of the business, which Centrica bought from the AA's 4.6 million member-owners for £1.1bn in 1999.

If Centrica does finalise the disposal, it will mark a symbolic end to the strategy of building a broad-based consumer services conglomerate, and be a tacit admission that the group has failed to achieve the advantages from cross-selling products that it hoped for five years ago.

Potential bidders are likely to include the biggest players in the insurance sector, with Aviva's Norwich Union division already thought to have taken a look at the business. The AA has expanded aggressively into motor, travel and home insurance and loans under Centrica's ownership. Centrica yesterday refused to comment on its plans for the division, which accounted for 10 per cent of the group's operating profit last year.

The group has been switching its focus back to the power market over recent months, making a series of acquisitions and other deals in power generation. Sir Roy Gardner, the chief executive, has wanted to boost in-house generating and storage capacity so that British Gas is not so dependent on the vagaries of the wholesale power market. Rising energy costs are hurting margins, Centrica warned last month.

Two weeks ago, the group bought the Killingholme power station in Lincolnshire for £142m, and earlier in the year it signed up an option to build a new gas-fired power station in Devon. The acquisition takes the number of plants operated by Centrica to six and the proportion of British Gas's energy requirements that are supplied in-house to 43 per cent.

One industry source said: "The energy market has changed, and Centrica needs to be more vertically integrated. There is plenty of cash on the books, so there is no urgent need to sell the AA, but if the right buyer comes along now, then the sale will happen."

A significant proportion of the sale proceeds could be returned to shareholders, sources say. Centrica is already under pressure to launch a share buy-back scheme, having found fewer opportunities than expected to invest in the United States.

Centrica is likely to argue that any final price tag for the AA should be compared not with the £1.1bn headline price it paid in 1999, but with £800,000, which stripped out the cash surplus inside the breakdown business. The acquisition was highly controversial at the time, bringing to an end 94 years of mutual ownership and generating windfalls of £248m for its members - including many carpetbaggers. The business was set up in 1905, originally to give advice to motorists on how to avoid police speed traps.

The number of AA customers has risen from 9.5 million at that time to 15 million now. The division made an operating profit of £93m last year, up 27 per cent on 2002.

Sir Roy said at the time of the deal that all Centrica's customers would benefit from the wider range of products and services on offer - and there were initially cheap gas offers for AA customers - but the synergies from the acquisition have mainly been from combining administration and call centres.

Centrica has backtracked on other investments in recent months. Last August, Centrica sold its stake in the Goldfish credit card business to Lloyds TSB for £112.5m. It still owns One.Tel, the telecoms company.