Printed from


Posted On: Jul. 26, 1998 12:00 AM CST

LONDON-Willis Corroon Group P.L.C. is ending speculation over its future after announcing last week that a consortium of insurers, private investors and management have made an acquisition bid for the broker.

Trinity Acquisition P.L.C., a consortium led by U.S. private equity firm Kohlberg Kravis Roberts & Co. L.P., last week issued a 951 million pounds ($1.56 billion) offer to acquire a majority stake in Willis Corroon, the world's fourth-largest broker.

The proposed deal shifts the spotlight to the future plans of its chief London-based rival, Sedgwick Group P.L.C. Sedgwick is the world's third-largest broker.

Some risk managers say the investment in Willis would ensure that there remains for buyers a choice of multiple large brokers. Others are taking a wait-and-see attitude toward how the deal would affect corporate insurance buyers.

John Reeve, executive chairman of Willis Corroon, said that moving to private ownership would allow the broker to focus on creating long-term shareholder value rather than short-term quarterly earnings.

KKR is investing up to 165 million pounds ($271.3 million) in Trinity and will provide bridge financing for the deal up to $575 million. The other five members of Trinity are Guardian Royal Exchange P.L.C., Royal & SunAlliance Insurance Group P.L.C., Chubb Corp., Hartford Financial Services Group Inc. and Travelers Property Casualty Corp.

The insurers together have agreed to put 193 million pounds ($317.3 million) into Willis. KKR also has arranged $475 million in senior debt financing from Chase Manhattan Bank.

Seven senior Willis executives, including the executive board comprising Mr. Reeve, Tom Colraine, Brian Johnson, George Nixon and Ken Pinkston, have agreed to invest in Trinity, committing a minimum of 100,000 pounds ($164,400) each to the deal.

Mr. Reeve said he anticipated the directors would commit substantially more than that amount. At the end of last year, the five board members held a total of 765,649 shares between them, either as ordinary shares, American Depositary Shares or ordinary shares held under restricted share plans to be released in February or November 2000. The latest Willis accounts for the year ended Dec. 31, 1997, show that individuals including executive directors held a total of 6% of Willis shares.

Although the Trinity offer could fail if another suitor offers 220 pence ($3.66) or more per share of Willis, or if less than 90% of the broker's stockholders accept the offer, insurance analysts see little chance of that happening.

Instead, many see it as a good exit route for investors who have been stuck in an underperforming sector of the stock market. Willis shares last hit the 200 pence ($3.29) mark in May 1994.

Willis executives have spent the past 18 months looking at various options available to the broker in order to thrive amid keen competition and the consolidation trend. The options considered included possible mergers with or acquisitions by competitors, strategic alliances with insurance companies or other financial services organizations, or continuing as a public company. At the same time, KKR had identified insurance brokerage as a sector in which it wanted to be involved, and it beat a path to Willis' door in late 1997.

Before the deal was announced, Trinity agreed to buy about half the Willis shares held by U.K. corporate investor Phillips & Drew Fund Management Ltd., totaling 42,558,502 shares and representing just under 10% of Willis' issued share capital. Trinity will pay PDFM 201.75 pence ($3.32) per share, including the 1.75 pence (2.9 cents) interim dividend announced the same day as the offer.

In total, Trinity has irrevocable undertakings representing 19.7% of Willis shares, including a further 39,742,692 shares from PDFM, Willis' largest single investor, 1,164,481 shares and 94,604 ADSs from the seven Willis executives, and 24,566 shares and 18,500 ADSs from independent directors.

The independent directors, led by Michael Rendle, have officially recommended the offer to Willis stockholders.

KKR's investment strategy includes having management buy into organizations they acquire, and Willis is no exception. If the offer succeeds, KKR will hold about 76% of the company, the five insurers will hold about 19%, and Willis management initially will have about 5%. Management's share could rise to as much as 15% if it exercises stock options granted on the back of the investment. KKR expects that hundreds of Willis managers across its global network eventually will be investing in the organization.

This is not KKR's first foray into the insurance market. Previous acquisitions have included American Re Corp., subsequently sold to Munich Reinsurance Co., and it currently owns Swiss reinsurer Rhine Reinsurance Co. Ltd. and Florida-based specialty auto insurer Bristol West Insurance Co.

KKR has about $6 billion of committed capital in an investment fund and invests on behalf of U.S. pension funds, banks and university endowments.

"We have a long-term horizon in investment," said Perry Golkin, a member of the firm at KKR based in New York.

Many-including Mr. Reeve-see that as one of the main benefits of the proposed deal.

By moving to private ownership, Willis will see a "very significant change in the culture prospectively," said Mr. Reeve.

On completing the deal, Willis "can take more risks and short-term pain to derive benefits in the medium term," said Mr. Reeve.

Willis' corporate gross revenues declined by 5.1% in 1997 to 694 million pounds ($1.14 billion). Pretax profits were up 4.3% last year to 95.5 million pounds ($156.4 million).

Removing the uncertainty of ownership that has been hanging over Willis' head for the past two years amid a wave of mergers and acquisitions among the global brokers will improve staff morale and help it attract new employees, broker teams and small brokerage operations, he said.

Mr. Reeve said that "whether real or otherwise," the specter of an acquisition "creates difficulties in a people business."

KKR will not interfere with the running of Willis should the deal be approved, said Mr. Golkin, but will work with the senior executives to develop the company.

In the past few months, Willis has followed an aggressive expansion strategy in Europe, buying minority shares in brokers in France, Germany and Italy (BI, July 20).

In all of those deals, Willis has the option to increase its holding to a majority stake over time, and Mr. Golkin said he foresees that occurring under the new ownership.

Many risk managers welcome the offer, not least because it retains choice at the global end of the broking industry.

"I've been concerned about the implications of the ongoing consolidation of megabrokers we have been witnessing in the past months," said Richard Reddaway, group insurance manager for pharmaceutical maker Glaxo-Wellcome P.L.C. in Middlesex, England.

Mr. Reddaway also welcomes the involvement of insurance companies in the proposed deal. This "reflects their desire to maintain their distribution network," he added.

Nigel Blore, controller, risk finance at U.K. telecommunications giant BT P.L.C., is among those risk managers who think it is too soon to know how the takeover will affect corporate insurance buyers.

"It remains to be seen what this actually means for clients as a whole. Willis Corroon is not a major supplier to us, and the jury is out at the moment as to what this will mean as far as the service they will provide and where they are going in the future," he said.

Mr. Blore maintained that it will take time to assess whether it will prove preferable that Willis is remaining a major force in the market rather than being absorbed by one of the larger broking giants. "Independence for its own sake may not necessarily be a good thing unless they can be seen to be adding value to their clients," he said.

Both Royal & SunAlliance and GRE have held shareholdings in Willis in the past, but those shares were beneath the 3% threshold that requires public disclosure.

Becoming involved in the Trinity consortium is "a trade investment made by our investment people," said a spokesman for GRE in London. Because GRE's investment will be about 3% if the offer is accepted, the spokesman said it is unlikely to change the insurer's relationship with Willis.

A spokeswoman for Royal & SunAlliance in London echoed those views, saying there would be "no change to our business relationship" with Willis.

Royal & SunAlliance has shareholdings in a number of U.K., U.S. and continental European brokers, she said, and would look at other opportunities to invest in brokers if they arose.

For its part, KKR is betting brokers will continue to have a key part to play in the commercial insurance market.

"We reached the conclusion that the broker will always have a role in the insurance industry," said KKR's Mr. Golkin. Even though insurance premiums are down in the soft market, even the most sophisticated of buyers can derive benefits from brokers, he added. "We think there is a role for brokers based on providing services."

KKR is not interested in buying a rival broker, said Mr. Golkin. Generally, though, in the insurance sector KKR is "very actively looking at all sorts of things. . .there could be more (acquisitions) down the line," he said.

If the proposal, which is expected to be concluded by the end of next month, is approved by shareholders, Willis will withdraw from the stock markets. Willis now is listed on the London, New York and Pacific stock exchanges. The proposal must also receive various government and regulatory approvals.

Trinity has offered 200 pence ($3.29) for each Willis share, and 10 ($16.44) pounds for each Willis ADS, one of which equals five Willis shares. This represents a 12% premium on Willis' closing price of 178.5 pence ($2.93) per share on July 21, the day before the deal was announced. News of the deal sent Willis' share price soaring to close at 197.5 pence ($3.25) on July 22.

Sedgwick shares also soared as markets speculated that it could be ripe for a take-over bid, closing at 146.5 pence ($2.41) on July 22 from a closing price of 134 pence ($2.20) per share the day before.

Roman Cizdyn, an insurance analyst with Merrill Lynch Group of Cos. in London, said, "Sedgwick has got to decide what it's going to do. There is now a scarcity value of large brokers. . . ." Mr. Cizdyn said large brokers grow their revenues through acquisition. For that reason, Sedgwick may now become a target for either Aon Corp. or Marsh & McLennan Cos. Inc.

Willis stock closed at 198 pence ($3.26) and Sedgwick closed at 144 pence ($2.378) on July 24.