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Aon sells benefits unit to Blackstone for $4.8 billion; reports financial results

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Aon P.L.C. will sell its benefits outsourcing business to private equity firm Blackstone Group L.P. for about $4.8 billion in a deal that offloads a significant portion of the benefits business the brokerage acquired with its 2010 purchase of Hewitt Associates Inc., the firms announced on Friday.

Aon will continue to partner with the new Blackstone-owned company that will house the benefits administration and HR business process outsourcing business but will invest the proceeds of the sale in other areas, said Greg Case, president and CEO of Aon, in a conference call with analysts.

The outsourcing business was a business that was more capital-intensive and produced lower profit margins, and now Aon can reinvest the capital in other areas, such as further investments in data and analytics, he said.

“What’s great about this is we’re taking our outsourcing assets, partnering with Blackstone — our clients are going to be exceptionally well served with Blackstone and the innovation they can bring to the table — and we’re going to then now be able to innovate more and more focused on our core strategy around risk, retirement and health on the topics of advice solutions and data,” he said.

In the deal, which is expected to close by the end of the second quarter, Blackstone will pay Aon $4.3 billion and up to an additional $500 million, depending on the performance of the unit. The new stand-alone unit will be headed by Chris Michalak, global chief commercial officer of Aon Hewitt.

According to an Aon fact sheet, the new company will have $2.3 billion in revenue, 22,000 staff and more than 1,400 clients.

Aon advised analysts modeling Aon’s earnings after the sale that going forward the deal would have taken out about $414 million in Aon’s 2016 operating income.

Rumors of a deal to sell the outsourcing unit first emerged in early December. According to Reuters, Blackstone edged out buyout firm Clayton Dubilier & Rice L.L.C. in an auction for the unit.

In a note to investors on Thursday, after news of the Blackstone deal broke, analysts at Keefe, Bruyette & Woods Inc. said the outsourcing business accounted for about 66% of Hewitt’s business at the time it was bought by Aon, which would account for about $3.23 billion of the original purchase price.

The sale furthers the investment case for Aon, with the company “deploying capital into the fastest-growth, highest-margin businesses,” the note said.

Fourth-quarter results

Meanwhile, Aon on Friday reported results for the fourth quarter of 2016 and the full year.

Total revenue for the fourth quarter of 2016 was $3.32 billion, a 1% increase over the same period last year. Net income for the quarter fell 14% to $509 million. The fall in profits primarily results from $158 million in pension expenses related to de-risking Aon’s U.S. pension plans.

Aon’s risk solutions unit, which includes its insurance and reinsurance brokerage business, reported revenue of $2.05 billion for the quarter, a 2% increase over the same period last year. The unit reported 3% organic growth, which was offset by a 1% unfavorable effect from foreign exchange.

Revenue for its HR Solutions business, which includes benefits consulting and the outsourcing business that Aon is selling to Blackstone, fell 1% to $1.28 billion during the fourth quarter. The decrease was “driven by a 4% decrease in commissions and fees related to net divestitures and a 2% unfavorable impact from foreign currency translation, partially offset by 5% organic growth in commissions and fees,” an Aon statement said.

Revenue for the year fell less than 1% to $11.63 billion, while net income edged up 1% to $1.43 billion.

The revenue fall was due to “a 2% decrease in commissions and fees related to divestitures, net of acquisitions, and a 2% unfavorable impact from foreign currency translation, each compared to the prior year, partially offset by 3% organic growth in commissions and fees. Risk Solutions total revenue increased 1% to $7.5 billion and HR Solutions total revenue decreased 3% to $4.2 billion,” the Aon statement said.