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Hub International OKs private buyout

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CHICAGO—Hub International Ltd. has become the latest publicly held brokerage to take advantage of the abundance of private equity capital shopping around the insurance brokerage marketplace.

The Chicago-based middle-market brokerage said last week that it had agreed to be acquired by funds advised by international private equity group Apax Partners together with Morgan Stanley Principal Investments, in a deal valued at about $1.8 billion, including the assumption of $145 million of debt.

Hub's management also took a stake in the company, which does business in the United States and Canada, and posted an acquisition-fueled $543.9 million in gross revenues in 2006, a 22.9% increase over 2005.

The Hub deal comes on the heels of Briarcliff Manor, N.Y.-based USI Holdings Corp.'s $1.4 billion buyout in January by GS Capital Partners, a private equity affiliate of Goldman, Sachs & Co. (BI, Jan. 22).

But unlike the USI deal, which was seen as a way for USI to get out of the public spotlight after recently struggling to meet analysts' expectations, there was no perceived need for Hub to go private, observers say.

Indeed, Hub, which was formed in 1998 through the merger of 11 Canadian insurance brokerages and is 26% owned by Toronto-based Fairfax Financial Holdings Ltd., is one of the better-performing middle-market brokers, they say.

But with a $40 per share buyout asking price, which represents a 28% premium to its 90-trading-day average closing stock price, observers say the deal was probably too good to pass up.

"Primarily, it was a really fair deal for our shareholders," said Martin P. Hughes, Hub's chairman and chief executive officer. "Apax approached me unsolicited, and I felt like I had an obligation to the shareholders," he said.

He noted, though, that Hub's new ownership structure also presents a "great opportunity" for the brokerage, its employees and its clients.

"We spend--and I personally spend--a lot of time on our public company obligations," he said. "I probably spent, over the last three years, 60 to 70 days each year on the road meeting with the investment community, meeting with Wall Street and attending investor conferences," he said. "It's a grind, and none of it has anything to do with building the business."

As a private firm, Hub's management will be able to devote all of its resources on building the business, which will only benefit clients, he said.

Mr. Hughes and other senior management themselves committed to invest more than $65 million of equity in the transaction, which is expected to close toward the end of the second quarter.

Observers characterize the deal not as a necessity for Hub but rather as a reflection of private equity groups' appetite for insurance brokerages.

They note that similar deals are inevitable and that insurance buyers may ultimately benefit from ownership changes (see story, page 29).

"I was very surprised. When I was asked beforehand whether I thought (a private equity buyout) was a possibility, I said, 'not with Hub,"' said Dean Evans, an equity research analyst with Keefe, Bruyette & Woods Inc. in New York. "I assumed they were going to be, long term, a public company. But at the same time, if you put me in their shoes and say, 'We're giving you a 20% premium to where your stock is today,' it's tough to say 'no."'

"I don't think they had to do this. I think they were a fine company and were doing well as a public entity, but with so much private equity capital in the market now, it's a compelling business case for management teams to consider a private equity transaction, especially one that affords a nice premium to public shareholders," said John Ward, chief executive officer of Cincinnatus Partners L.L.C., an insurance advisory firm in Cincinnati.

"It's a chance to reload, take the company off line and then take the company to a new level" before potentially again going public, he said.

"While they've struggled with organic growth like all the other brokers, Hub is certainly not a turnaround situation," said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago. "It's a well-run company that has implemented an effective acquisition strategy."

"Obviously, Hub's management and their new partners have a plan to enhance the value of the company before the assumed exit in three to five years, as typical with these type of private equity deals," he said.

Since its formation in 1998, Hub has embarked on an aggressive growth-by-acquisition strategy, swallowing up around 135 brokerages, including Chicago-based Mack & Parker Inc. in 1999 and New York-based Kaye Group Inc. in 2001.

Mr. Hughes said Hub's acquisition strategy will not change as a result of the deal and that the brokerage remains focused on filling out its geographic footprint, especially in the southeastern and southwestern United States.

Based on $349.2 million in 2005 brokerage revenues from U.S. clients, Hub was the 12th largest broker of U.S. business, according to Business Insurance's most recent broker rankings. About 25% of Hub's 2005 revenues were derived from its Canadian operations.