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Sale of Sedgwick to KKR could lead to growth for the company

Capital could fast-track product development

Sale of Sedgwick to KKR could lead to growth for the company

The pending sale of a majority of Sedgwick Claims Management Services Inc. to New York global investment firm KKR & Co. L.P. for $2.4 billion should position Sedgwick for growth but likely won't lead to immediate changes, experts say.

David North, president and CEO of Memphis, Tenn.-based Sedgwick, said in an interview the ownership change won't lead to any significant strategy or management shifts for the company, but it may provide finan-cial backing to speed the development of products and services Sedgwick was considering before the deal was announced last week.

Under the agree-ment, KKR and Sedgwick management will buy the ownership stake held by private equity investors Stone Point Capital L.L.C. and Hellman & Friedman L.L.C., which bought a majority stake in Sedgwick for about $1.1 billion in 2010 from Fidelity National Financial Inc. and other investor partners.

“The change of ownership in and of itself will not cause any change” in Sedgwick's operations, Mr. North said in the interview. “The reality is we'll change because we were going to change anyway. We're going to continue to develop new products and services and improve (claims) processing the way we always have.”

Sedgwick provides claims management for workers compensation, disability, managed care and other insurance claims. It handles more than 2 million claims a year.

Analysts agreed Sedgwick's clients likely will not notice much difference in the company's operations after the sale to KKR closes, which is expected during the first quarter.


“I do not expect this transaction to have any effect on the customers of Sedgwick,” Charles J. Sebaski, equity analyst with BMO Capital Markets in New York, said in a statement.

“KKR is a very experienced private equity firm in the insurance and insurance services arena, and I doubt they would upend the business materially,” he said.

Though it is expected to maintain its current course of business, KKR might look to grow Sedgwick through additional acquisitions of smaller competitors, said Meyer Shields, managing director and analyst with Keefe, Bruyette & Woods Inc. in Baltimore.

“This is a business that benefits from having scale,” Mr. Shields said. “We're seeing, for example, lots of success at (Gallagher Bassett Services Inc.) in the same business. So I think ... to the extent that KKR's got deep pockets to support continued acquisitions, that's the most likely change.”

Sedgwick is the nation's largest TPA, according to the most recent data provided to Business Insurance. The firm reported $1.15 billion in gross revenue in 2012.

Itasca, Ill.-based Gallagher Bassett, a division of publicly traded brokerage Arthur J. Gallagher & Co., is Sedgwick's largest competitor, with $571.7 million in gross revenue in 2012.


During a conference call last week to discuss fourth-quarter results, Gallagher Bassett Chairman, President and CEO J. Patrick Gallagher Jr. said KKR's investment in Sedgwick shows that the TPA market is “a very valuable business.”

“I think we all know that KKR is very, very smart money, and they've made a very big bet in a business that we believed in without hesitation for 30-plus years,” Mr. Gallagher said in a transcript of the conference call. “And there have been times over that 30-plus years, actually 40-plus years, that we've been questioned as to whether or not we're going in the right direction, and I think it proves the point that this is a very, very dynamic business and a great business.”

Sedgwick's Mr. North said the specific amount of KKR's ownership stake has not yet been determined, though he did say KKR will be a “substantial majority owner.” Sedgwick's management will own a small stake after the buyout with KKR, a company spokeswoman said, declining to elaborate further on management's participation in the deal with KKR.

Calls last week to KKR, Stone Point and Hellman were not returned.

Mr. North said Sedgwick approached KKR about a deal in December as part of the company's typical life cycle for securing private equity investors. Indeed, this will be the third time Sedgwick has changed hands since 2006. In that year, Marsh & McLennan Cos. and Stone Point sold Sedgwick for $635 million to title insurer Fidelity National Financial Inc., Thomas H. Lee Partners L.P., Evercore Capital Partners and other minority shareholders.


“We've had ... models before where we have multiple private equity investors and where we've had single private equity investors, and candidly, we don't see much difference in how the company operates,” Mr. North said.

Already, KKR holds a stake in Newport Beach, Calif.-based brokerage Alliant Insurance Services Inc. and San Diego-based insurance technology provider Mitchell International Inc., according to KKR's website. The investment firm previously had an ownership stake in brokerage Willis Group Holdings P.L.C.

Mr. North said that KKR's insurance-related holdings operate with separate boards and shareholder groups.

Alex J. Lopez, an analyst with Portales Partners L.L.C. in New York, said Sedgwick is known in the marketplace as a strong TPA, and that investors look favorably on the overall TPA market.

“Particularly for investors and for private equity investors, I think they see the TPA business as a nice, fairly simple cash-generating business,” Mr. Lopez said.