Arthur J. Gallagher & Co.'s proposed buyout of Australian conglomerate Wesfarmers Ltd.'s insurance brokerage operations would instantly give Gallagher a giant footprint in Australia and position the large U.S. broker for growth in Asia, according to industry analysts.
The nearly $940 million acquisition will be the biggest deal in Gallagher's history.
Itasca, Ill.-based Gallagher already has offices in Australia and entered the New Zealand market earlier this month, with its purchase of Mike Henry Insurance Brokers Ltd. for an undisclosed sum. But Gallagher so far has only one office in Asia, located in Singapore.
Under the proposed deal, which Gallagher announced last week, Gallagher will pay 1.01 billion Australian dollars — about $936.3 million — for the Sydney-based brokerage operations of Perth, Australia-based Wesfarmers, a conglomerate that includes supermarkets, department stores, mining, chemicals and other businesses.
The insurance brokerage operations generated AU$331.1 million — about $306.9 million — in revenue for the year ended June 30, 2013. It has more than 50 offices in Australia, New Zealand and the United Kingdom with about 1,700 employees.
Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Va., called Gallagher's move “a big deal” that represents “a significant piece in building out their international franchise.”
The Wesfarmers brokering operations include OAMPS Insurance Brokers Ltd. in Australia, OAMPS (UK) Ltd. in England and Crombie Lockwood Ltd. in New Zealand.
The deal is subject to regulatory approval and is expected to close during the second or third quarter of this year, according to a statement issued by Gallagher. Wesfarmers sold its insurance underwriting business to Insurance Group Australia Ltd. late last year.
In a conference call last week, Gallagher Chairman, President and CEO J. Patrick Gallagher Jr. called the deal “a coup for our company.”
“They sell right into the middle market,” very similar to what Gallagher does in the United States, said Mr. Gallagher. “I think the combined organization will be very attractive to potential partners.”
Gallagher also announced last week an underwritten public offering of 19 million shares of common stock. The company “intends to use the net proceeds of the offering to fund a portion of its previously announced acquisition of the Wesfarmers insurance brokerage operations,” it said in a statement.
Industry analysts tended to view the proposed acquisition favorably.
“I guess it wasn't unexpected,” said Timothy J. Cunningham, managing director at Chicago-based Optis Partners L.L.C., an investment banking and financial consulting firm that serves the insurance distribution industry. Mr. Cunningham noted that Gallagher had recently enhanced its presence in the United Kingdom with two high-profile purchases, paying £199 million ($329.9 million) for Oval Group of Cos. earlier this month and £233 million ($386.2 million) for Giles Group of Cos. in September.
“I think this is more strategic than tactical,” said Mr. Cunningham. “They're going into countries that are English-speaking and have insurance systems similar to ours.”
If growth is not sufficient domestically, it makes sense to go where there are similarities, he added. “They're going to be a very significant player down there all of the sudden.”
Mr. Dwelle called Australia a “good market,” adding that “it gives them an entrée to the Far East generally” as well as adding to their existing presence in Australia, New Zealand and the United Kingdom.
“If you were going to plant a flag in that part of the world, you kind of use Australia as a jumping-off point,” said Mr. Cunningham. “It would seem logical that it's that kind of progression.”
“It looks like those are markets that are growing,” said James Auden, managing director at Fitch Ratings Inc. in Chicago. “When we think of Gallagher, they have international business but not on the scale of a Marsh (L.L.C.) or Aon (P.L.C.), so this appears to be an opportunistic move.”
“On the whole it's positive,” said Paul Newsome, managing director at investment banking firm Sandler O'Neill & Partners L.P. in Chicago. “It definitely adds scale and size to Gallagher.”
“All things being equal, I would give them the benefit of the doubt in making a big purchase in a foreign country and being disciplined about it,” said Mr. Cunningham.
“I don't think there's any capital pressure on them,” said Mr. Cunningham. “They've got enough cash to continue to do deals. The flip side is: Is the Wesfarmers deal going to take all of their integration attention?”
“I fully expect they will continue on an acquisition path,” said John Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio. “They've built quite a track record of successful acquisitions and as long as they are able to successfully issue new shares, I think this will continue.”
RBC Capital's Mr. Dwelle noted that Gallagher spent about $1.2 billion in five days for the Wesfarmers and Oval acquisitions.
“That's a pretty good spending spree for anybody,” he said.