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USI mulls private ownership

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BRIARCLIFF MANOR, N.Y.—USI Holdings Corp. is mulling whether to once again become a privately held company--a move observers say could ultimately benefit the brokerage, which recently has struggled to meet the expectations of equity analysts.

With private equity ownership, Briarcliff Manor, N.Y.-based USI could focus more on shoring up its financials and building the brokerage without the distractions and compliance costs associated with being a publicly traded firm, they say.

And such attention to building a better business would likely benefit buyers, they add.

USI's announcement last week that it has formed a special committee of outside directors to review a buyout offer it received from a private equity firm also reflects growing interest by private equity investors in the retail insurance brokerage business, observers say (see story, page 35).

The news comes less than a week after USI agreed to pay $83 million to acquire Seattle-based brokerage Kibble & Prentice Holding Co.--the second largest deal in USI's history behind its 2005 acquisition of Summit Global Partners for which it paid $119.9 million in cash, stock and assumed liabilities.

With its diversified revenue mix of property/casualty broking, employee benefits broking and other financial services, Kibble & Prentice is expected to contribute approximately $37 million in annual revenues to USI.

Based on 2005 brokerage revenues, USI was the ninth largest broker of U.S. business with $504.3 million, according to Business Insurance's annual rankings.

Formed in 1994 by well-known insurance brokerage executive Bernard H. Mizel, USI has employed an aggressive growth-by-acquisition strategy and went public in 2002.

Observers say USI is likely to strike a deal with a private equity firm as the brokerage continues to miss revenue and earnings expectations.

USI last week said it expects to report between $130.5 million and $131.5 million in total revenues for the third quarter of 2006, up modestly from the $127.3 million reported in the third quarter of 2005. Net income is estimated between $8 million and $9 million, USI said, compared with $9.8 million in the 2005 third quarter.

In a note last week about the potential buyout, David Lewis, an analyst with SunTrust Robinson Humphrey in Atlanta, gave a better than 70% chance that USI would be acquired at a minimum price of $17 to $19 per share.

"We believe (USI) could finalize its integration and margin expansion program quicker as a private company with cheap capital to continue pursuing strategic acquisition opportunities," Mr. Lewis wrote in the note. "USI has struggled to meet analysts' revenue and earnings forecasts over the past several quarters, causing the company to trade at a significant discount to its better respected peers."

"I think a buyout is highly likely," said another USI analyst, who asked not to be named. About 40% of USI's stock is held by so-called activists, that is, shareholders that use their equity stake as an opportunity to redefine and redirect the management of the corporation. "When you're on the cusp of missing expectations yet again and you want to keep your jobs, you'd probably start talking to someone to sell the brokerage," the analyst said. Otherwise, if expectations are missed, shareholders are likely to want to sell to the highest bidder and management will change.

"It's a good option for USI," said John Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an insurance advisory firm. "I believe USI is a little bit on the small side to be a public company." Not only are there high compliance costs associated with public firms, but there also is the intense scrutiny of the public eye and the distraction that can cause in executing a business strategy. "One advantage of private equity is there's not the fishbowl effect and you're able to focus really on your strategy and building your franchise up," he said.

Timothy J. Cunningham, a principal with insurance advisory firm OPTIS Partners L.L.C. in Chicago, agrees that there are benefits for USI in becoming private.

In addition to reducing expenses, a buyout would mean that "management could focus on the long-term issues in lieu of keeping the investment community happy each fiscal quarter," he said.

Clients of USI may also benefit from a buyout as a private equity firm would focus on growing and building the brokerage in an effort to maximize returns and that would ultimately benefit USI customers, observers say.

"Private equity would enable a retail broker to focus more on building their business and delivering good service to their customers," Mr. Ward said.

Large companies with risk managers are "attracted to brokers that have a footprint that meets all of their needs," said John Wepler, president of Marsh Berry & Co. Inc. in Concord, Ohio. "If, for example, private equity funds a super-regional privately held agency and they buy a bunch of agencies across the country, infuse leadership and expand their geographic reach, there is a better likelihood of meeting the national needs of the commercial insured," he said.