A rumored deal to sell Sedgwick Claims Management Services Inc. is part of the standard life cycle for private equity deals, investment analysts say, though one source notes the timing could be tied to a recent firming of the workers compensation market.
Stone Point Capital L.L.C. and Hellman & Friedman L.L.C., which bought Sedgwick for about $1.1 billion in 2010, reportedly have been discussing a sale of the third-party administrator to a “small group of private equity buyers,” according to Reuters. The supposed deal could be valued at more than $2 billion, according to unidentified sources cited in the report.
A company spokeswoman told Business Insurance that “Sedgwick doesn't comment on rumors.” Calls to Stone Point and Hellman were not returned last week.
Memphis, Tenn.-based Sedgwick is the nation's largest TPA, according to the most recent data provided to Business Insurance. The firm reported $855.5 million in revenue from self-insured clients in 2011.
Itasca, Ill.-based Gallagher Bassett Services Inc. is Sedgwick's next-largest TPA competitor, with $463.8 million in revenue from self-insured clients in 2011.
Analysts who follow Gallagher Bassett's publicly traded parent company, Arthur J. Gallagher & Co., say Sedgwick is seen as a strong competitor in the TPA market and that they believe a potential sale would be part of the typical deal life cycle for private equity investors.
TPAs like Sedgwick are seen as “a fairly predictable cash flow-generating business — the kind that private equity firms certainly like,” said Charles J. Sebaski, an equity analyst with BMO Capital Markets in New York.
Meyer Shields, managing director and analyst with Keefe, Bruyette & Woods Inc. in Baltimore, said that the firming workers comp market would prompt some employers to move toward self-insured workers comp programs. That shift would increase the demand for claims handlers like Sedgwick and Gallagher Bassett, and could factor into potential discussions about Sedgwick's future, he said.
“I assume that that's part of the timing of it,” Mr. Shields said. “I wouldn't view it as a sign that something's not working at Sedgwick.”
Both Mr. Sebaski and Mr. Shields say private equity firms or institutional investors would be the most likely candidates to consider buying Sedgwick.
While Arthur J. Gallagher has brokerage and TPA services, sources say it's unlikely that brokers such as Marsh Inc. or Aon P.L.C. would consider acquiring Sedgwick or another TPA at this point.
“There's not an enormous appetite for owning this business,” Mr. Shields said. “So it's certainly possible that one of the bigger brokers would want to own them, but I think that's unlikely.”
While Mr. Sebaski does not follow Sedgwick, he said it's possible that a potential buyer could help Sedgwick gain financial leverage, if needed.
“Being that it's the only one of its kind of this size and a stand-alone outside of any other business, I don't know if that makes it more challenging environment (or) if that makes its cost of financing higher — some of the things that an institutional investor or (private equity) firm might be able to help with... very quickly,” Mr. Sebaski said.