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C.E. Heath P.L.C.

133 Houndsditch, London EC3A 7AH, England; 44-171-234-4000;

fax: 44-171-234-4111;


1996 1995

Gross revenues $233,850,672 $309,521,466

Brokerage: Retail 36.1% 21.86%

Wholesale 23.5% 21.06%

Reinsurance 16.3% 11.66%

Personal 13.8% 7.88%

Services 0.7% 0.42%

Investment income 8.7% 7.73%

Other 0.9% 29.39%

Employees 2,706 3,349

Rev./Employee $86,419 $92,422

Offices 70 63

Converted at applicable exchange rates. Fiscal year ends March 31.

C.E. Heath P.L.C. is adding an interesting twist to the mergers and buyouts that are all the rage in the international brokerage community: It is buying itself out.

After failing to merge with any other broker, a management buyout proposal went to shareholders late last month. If successful, the MBO would remove Heath as one the few remaining mid-sized brokers on the London Stock Exchange.

Although some stock analysts question whether Heath's strategy is the right one for the broker (BI, June 9), management says going private will halt damaging speculation over Heath's future as an independent company and will allow it to use equity to lock in key staff and undertake costly long-term restructuring.

Chief Executive John Mackenzie Green is confident that taking the company private "will remove the unhelpful speculation concerning C.E. Heath's independence and will allow management to undertake major restructuring, with its attendant risks, which is necessary to reposition the C.E. Heath group to withstand the highly competitive environment facing the insurance broking industry."

For the past year, Heath's senior management has examined what steps the company should take to survive in the changing and turbulent brokering fraternity.

"Project Destiny," led by Operations Director Paul Hughes, was launched July 1996 as a "fundamental review of U.K. administrative and processing functions aimed at increasing the group's profitability," according to Heath Chairman Michael Kier.

This "re-engineering process is expected to be implemented progressively over the next two years," Mr. Mackenzie Green wrote in a letter to employees during the MBO offer.

"Project Destiny is aimed at substantially improving the cost/income ratio within the group whilst better enabling us to meet the changing needs of our clients," he explained in the letter.

"In taking Project Destiny forward, it will be necessary to incur substantial up-front costs and as the project is still at a relatively early stage its implementation carries a number of significant risks, whilst at the same time the benefits cannot be quantified with any certainty," said Mr. Mackenzie Green.

The business risks from Project Destiny would have been "difficult for C.E. Heath to take as a listed company," said Mr. Mackenzie Green in his letter, adding that the investors involved in the buyout "will assist the group in implementing the restructuring that is required to restore our long-term competitiveness."

The new holding company will be called Erycinus. Venture capital for the buyout will come from DLJ Phoenix Private Equity Ltd., a fund of DLJ Phoenix Securities; Candover Partners, a provider of equity for larger buyouts in Europe; and investment management company Electra Fleming, as well as 14 U.K.-based senior executives of C.E. Heath and eight senior executives of C.E. Heath's overseas subsidiaries.

Management and overseas executives will subscribe for 13.69% of Erycinus's ordinary share capital, and an employee share ownership trust will be established to acquire a further 12.72%. Under the terms of the employee share ownership trust, 85 other executives of Heath will be given the opportunity to participate in 9.82% of the ordinary share capital of Erycinus. The remaining 2.91% of the ordinary share capital will be kept available to be allocated in the future to new executives who may join C.E.


The MBO offer values each Heath share at 143 pence ($2.42), and the entire issued share capital at about 96.1 million pounds ($162.3 million). This represents a premium of 52% to the average price of a Heath share over the preceding six months.

Among senior management, Mr. Mackenzie Green will invest about 750,000 pounds ($1.27 million); Mr. Hughes about 150,000 pounds ($253,275); Mr. Kier about 146,000 pounds ($246,521); and Finance Director Tim Tookey about 67,000 pounds ($113,130).

The decision to launch an MBO was in response to increasing uncertainties for C.E. Heath as a midsize insurance broker.

"In recent years, the insurance markets have been characterized by intense competition and excess capacity, leading to a harsh rating environment and consequent pressure on margins," Mr. Mackenzie Green explained.

"In addition, insurance brokers have faced further competition from direct insurers and have suffered from the increasing use of captive insurance companies and alternative risk transfer mechanisms by their larger corporate clients," he noted.

"These pressures have caused many of the major participants in the insurance industry to review their competitive positions, culminating in a number of mergers and acquisitions taking place over the last two years," Mr. Mackenzie Green said in his letter.

"The consolidation of the industry has intensified over the past 12 months, leaving C.E. Heath as one of the few remaining quoted medium-sized U.K. insurance brokers," he told employees this month.

"During this two-year period, C.E. Heath has held discussions with a number of parties concerning the possibility of participating in this consolidation process," he said, adding that "these discussions did not, however, result in any firm proposals."

Mr. Tookey said: "After the buyout we will be in a unique position. We will be able to offer clients a terrifically stable environment while other brokers are still busy integrating their (newly consolidated) companies."

"Many of our producing brokers and overseas suppliers will be shareholders, offering a worldwide enfranchisement," Mr. Tookey noted.

Named to the Erycinus board were Non-Executive Chairman Ian Martin and Deputy Chairman Hamish Mackay. Mr. Martin also is chairman of Unigate P.L.C., a dairy products company. Mr. Mackay previously was chief executive of broker The Frizzell Group P.L.C.

Heath management says taking the company private will:

Better equip Heath to implement Project Destiny, which would have been difficult as a publicly listed company because of the costs. Mr. Mackay implemented a similar project as chief executive of the Frizzell Group.

Bring an end to the "damaging speculation" on Heath's future, which has created an uncertain environment for Heath's producers and clients.

Provide the management and other key business producers with a significant equity interest in the business during what will be a critical phase in the company's development.

"We believe that, as a privately owned insurance broking group in which management will have a significant equity participation, C.E. Heath will be better positioned to adapt to and benefit from the major changes that are affecting the insurance broking industry," Mr. Martin said.

Equity incentives also will help Heath "recruit high-quality insurance professionals who may be dissatisfied with the impact of the consolidation taking place elsewhere within the insurance broking industry."

Much of the groundwork for Heath's radical move was laid last year when the group downsized to just its core insurance brokering subsidiaries, splitting its computer services division into a separately quoted public company, Rebus Group P.L.C., and disposing of its remaining underwriting companies.

As a result, the group's revenues for the year ended March 31, 1997, are down significantly from the previous year. Gross revenues, including investment and other income, fell 25% to 147.6 million pounds($233.9 million) in fiscal 1996, compared with 197.7 million pounds ($309.5 million) a year earlier.

Insurance brokerage revenues-including telephone marketing of personal insurance-increased 7% to 133.5 million pounds ($211.5 million).

Although net profits picked up significantly, rising 57.9%, to 9 million pounds ($14.3 million) for fiscal 1996, after a 45% slump in net profits the previous year, pretax profits fell 37% to 13.6 million pounds ($21.5 million). This apparent inconsistency is due primarily to a 9.4 million pounds ($16.1 million) tax payment made in the 1996 accounts for disposal of investments.

The number of employees fell 19% to 2,706, due to the de-merger of the group's computer operations and sales of its underwriting subsidiaries. However, the number of commercial retail brokerage offices increased to 70 from 63.

Mr. Tookey said Heath had refined its operations down to those of core brokering and will "continue to offer clients a full broking range."

Heath, like all brokers, has seen further reductions in rates in all areas over the last year and "significant reductions in certain areas," said Mr. Mackenzie Green. Yet, Heath recorded a 4% growth in property/casualty insurance and reinsurance brokerage revenues.

Areas where Heath has a particular strength as a broker are aviation, oil and gas, and international facultative business, Mr. Tookey said.

"We have tightened the control over expenses, especially in the U.K., where underlying expenses have been reduced by 2%, despite the continued pressures to retain and reward our strongest business performers," Mr. Mackenzie Green said.

Premium Search, the group's recently established unit to telephone market personal lines auto and homeowners insurance in the United Kingdom, achieved a 78% growth in brokerage revenues to 10.6 million pounds ($16.8 million), and incurred a pretax loss of 900,000 pounds($1.4 million), which compares favorably with the previous year's loss of 3.5 million pounds ($5.5 million).

During the year the company also has "continued to invest in overseas offices" and has been "actively seeking joint venture opportunities in areas of the world where we can both add value locally and create opportunities for our London-based wholesale operations," said Mr. Mackenzie Green in the company's annual statement.

Mr. Tookey said the company is in final negotiations with several joint ventures in South America and Eastern Europe. He would not give details on the ventures.