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USI to go private in equity firm deal


BRIARCLIFF MANOR, N.Y.—USI Holdings Corp. is moving out from under the public microscope.

Less than five years after its initial public offering, USI said last week it had entered into a $1.4 billion definitive agreement to be acquired by GS Capital Partners, a private equity affiliate of Goldman, Sachs & Co.

USI announced in October that it had formed a special committee of outside directors to review a private equity buyout offer (BI, Oct. 30, 2006).

The agreement--which follows a string of recent deals involving private equity within the insurance brokerage industry--should result in a stronger, more focused company, which has recently struggled to meet analysts' expectations, observers say. And that can ultimately only benefit insurance buyers, they add.

USI's move also may be a harbinger of more private equity deals to come that take large publicly held insurance brokerages into private ownership, some predict.

Under terms of the agreement, USI stockholders will receive $17 in cash for each share of USI common stock they hold, representing a 20.5% premium on the average closing share price for the 30 calendar days prior to USI's October special committee announcement. Shares of USI closed at $16.50 on Friday.

The transaction, which is expected to close in the second quarter, also includes repayment of USI's existing debt obligations, which one analyst estimates at $393 million.

While there is still time for another firm to make an offer to acquire USI, analysts say that other bids are unlikely due to the value of the deal and the time it took to reach a definitive agreement.

According to a Securities and Exchange Commission filing, if the deal were to be terminated under specified circumstances, USI would owe Goldman Sachs $41 million, while under other circumstances, Goldman Sachs would be required to pay USI a termination fee of $15.7 million.

In a statement, David Eslick, USI's chairman and chief executive officer, described the deal as being in the best interest of shareholders and that GS Capital Partners "believes in our commitment to investing in our people and is committed to working with us to deliver the most value for our clients and customers."

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

Formed in 1994 by well-known insurance brokerage executive Bernard H. Mizel, USI embarked on an aggressive growth-by-acquisition strategy and went public in 2002. As a public company, though, USI's margins have fallen below analysts' expectations recently.

As a private company, USI will be able to take a longer-term view to shoring up its financials and building the brokerage, which should ultimately result in a stronger company and benefit clients, observers say.

"The problem as a public company is that they probably couldn't get some of the improved margins that they thought they could ultimately get, because they had analysts and investors watching over them every quarter," said David Lewis, an analyst with SunTrust Robinson Humphrey Capital Markets in Atlanta. "I think under this organization, it will allow them to...make some of the hard decisions that I think ultimately will be better for their customers and their employees."

Going private will be a "real positive for customers of USI," said John L. Ward, CEO of Cincinnati-based advisory firm Cincinnatus Partners L.L.C. "The pressure and the scrutiny that comes with being a public company and the pressure to meet Wall Street's expectations quarter to quarter sometimes doesn't always align with what's best for the customer base."

Issues such as margin expansion and integration are "oftentimes better dealt with as a private company where you can look at your progress over a longer-term horizon," he said.

Volatility shield

"This has been a story consistent with earnings volatility, and a private company can withstand that a lot better than a public company," said Nik Fisken, a USI analyst with Stephens Inc. in Little Rock, Ark. "Private equity takes a much more long-term view, and I bet (USI) gets fixed quicker and comes back out to the public markets once we get some rate increases instead of rate decreases."

John Wicher, principal of San Francisco-based advisory firm John Wicher & Associates Inc., said the deal benefits both USI and its customers.

For USI, it solves the "leverage issue that was banging up against (its) appetite for acquisitions," eliminates "all the headaches" of being public and gives it access to capital, he said. "For the customers, it means a stronger, better-positioned broker," Mr. Wicher said.

USI's deal is the latest in a string of deals involving private equity in the retail brokerage business over the last year (BI, Oct. 30, 2006).

And given the continued interest among private equity firms and the amount of capital they have to invest, observers say they wouldn't be surprised to see another big publicly traded brokerage coming under private equity ownership.

"My sense is that the tier-one private equity firms have a heightened interest in insurance brokers and, as I understand it, Goldman Sachs was not the only one interested in USI," Mr. Fisken said. "So I think there is at least (one private equity firm) left with an appetite."

"I wouldn't be shocked to hear of another major deal...just because of the amount of capital floating around," said Timothy J. Cunningham, a principal with insurance advisory firm OPTIS Partners L.L.C. in Chicago.

"There continues to be a lot of talk" among private equity firms, which are attracted to the retail and wholesale brokerage industry for several reasons, he said. It's not "a terribly capital intensive business," it generates "a fair amount of cash flow" if run properly and it is a "fairly simple" business to understand. "The negative is the soft market and its duration."