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ABD parent reviews options for brokerage

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EAST PALO ALTO, Calif.—Speculation is mounting that Greater Bay Bancorp will divest insurance brokerage unit ABD Insurance and Financial Services Inc. on completion of a strategic review of the bank's operations.

The review is being conducted to help determine how best to allocate the bank's capital and will examine the performance and strategic fit of its three business units--community banking, specialty finance and insurance brokerage, said one analyst who spoke with Greater Bay's management.

The East Palo Alto, Calif.-based bank recently disclosed its review at investor meetings, but a spokesman would confirm only that the bank has hired an outside consulting firm to analyze its operations and that the review should be completed in the second quarter.

Analysts say a logical review outcome would be the sale of the Redwood City, Calif.-based brokerage, which one observer described as being of "unique interest" to private equity firms. As evidenced by the recent buyouts of USI Holdings Corp. and Hub International Ltd., private equity firms have been particularly interested in investing in retail brokerages lately.

Although ABD has been a solid contributor to Greater Bay's earnings over the years and has helped diversify its business, analysts say the bank could take advantage of the high demand for retail brokerages and then be in the position to use the capital for other purposes, such as share buybacks.

At the same time, Greater Bay itself remains on analysts' lists as a possible acquisition target. If the bank decides to go that route, divesting ABD would make it a more attractive sale as many banks are not interested in operating a large commercial insurance brokerage operation, analysts say.

In one of the largest bank/broker deals to date, Greater Bay acquired ABD in late 2001 for nearly $200 million (BI, Dec. 24, 2001). One analyst estimates that, given pricing trends of the recent private equity buyouts of USI and Hub, ABD could be worth $500 million in a buyout.

ABD, which ranked as the nation's 15th largest broker of U.S. business in Business Insurance's most recent broker rankings, reported $164 million in gross revenues in 2006.

The brokerage serves the middle and upper middle market through 830 employees in 23 offices primarily in California, Colorado, Nevada, Oregon and Washington state. It is particularly well-known for its directors and officers liability and technology specialties.

While spokesmen for Greater Bay and ABD declined comment on the possibility of a sale or spinoff of ABD, analysts say such a scenario is likely.

"It makes sense to sell (ABD) outright," said Joe Morford, an analyst with RBC Capital Markets Corp. in San Francisco, who discussed the review with Greater Bay management recently and issued a report earlier this month that evaluates the bank's options for ABD.

ABD revenues are projected to grow at a low single-digit pace this year due in part to the soft market, Mr. Morford said. "Our hypothesis is, with some of the multiples being paid in recent transactions, the fact that the business is not growing too much...here may be an opportunity to sell the business for a premium," he said. The bank can then use the capital in other ways including higher dividends, share buybacks or other growth initiatives.

"My sense is at this point, given the valuations of recent deals, it's certainly something I think (Greater Bay) would be considering," said Brent Christ, an analyst with Fox-Pitt, Kelton in New York. ABD "has performed fairly well for them over the last couple of years...but at the same time, this is a bank that people also tend to talk about" as an acquisition target. "Certainly a divestiture of ABD would help pave the way or make it easier to sell the bank as a whole."

Given recent valuation trends, Greater Bay could fetch as much as $500 million for ABD, said Brett Rubatin, an analyst with FTN Midwest Securities Corp. in Nashville, Tenn., who issued a report last month describing a sale or spinoff of ABD as not necessarily "imminent" but a "solid possibility."

While Greater Bay paid roughly double ABD's revenue in its 2001 purchase, GS Capital Partners L.P.'s recent $1.4 billion buyout of USI was about 2.5 times its revenue and Apax Partners' recent $1.8 billion acquisition of Hub equates to about 3.4 times its revenue, he said.

"The strategic review by consultants sounds a little unusual for a bank of this size, but it's not something unusual for this management," Mr. Rubatin added. "It may end up being nothing, but it certainly would appear logical that ABD--given it's a premium institution--would fetch a solid price."

John Wepler, president of agency consulting firm Marsh Berry & Co. in Willoughby, Ohio, represented Greater Bay in its 2001 acquisition of ABD. "If Greater Bay and ABD decide to do something, ABD would be of unique interest to the private equity community because of their West Coast dominance, their strength of leadership, and the fact that they've had a strong history of organic growth and demonstrated their ability to close and integrate acquisitions," Mr. Wepler said. "They kind of have the whole package."