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Aon’s Willis purchase moves closer as Gallagher reaps benefit

Posted On: May. 12, 2021 2:35 PM CST

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Arthur J. Gallagher & Co.’s $3.57 billion acquisition of various Willis Towers Watson PLC businesses will help Aon PLC secure its much bigger deal to buy Willis and allows Gallagher to significantly expand its business for a relatively low purchase price, analysts say.

The widely expected Gallagher deal, which was announced Wednesday, includes most of Willis’ reinsurance business, which would make Gallagher the No. 3 broker in a field it only began to significantly compete in over the past several years, and adds retail businesses in France and several other European countries as well as some specialty businesses in the United States.

The announcement comes after European Union regulators pressured Aon to sell various businesses to secure antitrust approval of its purchase of Willis, which was announced in March 2020.

Gallagher will acquire businesses representing about $1.3 billion in annual revenue with $357 million in earnings before interest, taxes, depreciation, amortization and coronavirus and more than 6,000 staff. About $750 million relates to reinsurance revenue, $500 million to European insurance broking revenue and $50 million to North American revenue.

J. Patrick Gallagher Jr., chairman, president and CEO of Gallagher, told analysts Wednesday that the agreement was a “seminal moment” for the brokerage.

Gallagher, the longtime fourth-largest brokerage, already was poised to become the world’s third-largest brokerage with the completion of the Aon-Willis deal. Its proposed purchase of Aon-Willis assets will push its annual revenue to over $7 billion compared with $5.99 billion in 2020.

Aon said in a statement that the deal “resolves questions” raised by the European Union and will also address concerns raised by regulators in other jurisdictions, including the United States. The deal with Gallagher is contingent on the closing of the Aon-Willis deal. Gallagher said it expects to close its deal with Aon and Willis in the second half of the year and “perhaps as early as July 1.”

Aon said that under the terms of the deal to purchase Willis businesses, Gallagher will acquire:

  • Willis Re, excluding operations in China and Hong Kong.
  • Global cedent facultative reinsurance, excluding operations in China and Hong Kong.
  • Willis’ Inspace unit, which covers space risks, and certain aerospace manufacturing business.
  • Corporate risk and broking services in France, Germany, the Netherlands and Spain, excluding its affinity business; Bermuda; cyber in the United Kingdom; and certain accounts in Houston and San Francisco.
  • Corporate risk and broking services for property/casualty and financial lines in the European Economic Area, U.K., U.S., Brazil and Hong Kong relating to certain large multinational companies headquartered in France, Germany, the Netherlands and Spain.
  • Corporate risk and broking financial lines accounts relating to certain large multinational companies headquartered in the U.K.
  • Health and benefits business units in France, Spain and Germany.

The purchase price of 10 times EBITDAC is relatively low compared with valuations of other brokerages, which can run as high as 14 times earnings for some companies, said Timothy J. Cunningham, principal at Optis Partners LLC, a Chicago-based investment banking and financial consulting firm.

“It’s reflective of, Aon has to do it, it can do it with one buyer, and it can do it relatively quickly,” he said.

In an open market deal, the Willis assets would likely have been sold for a higher multiple, said Joe Marinucci, primary credit analyst at Standard & Poor’s Global Ratings, in New York.

“Under these circumstances you’ve got a very motivated seller and motivated buyer looking to develop scale and presence beyond its core North American footprint. … It’s a good deal, partly because of the circumstances of there not being many buyers,” he said.

Gallagher is acquiring the Willis assets for a “great price,” Elyse Greenspan, managing director of equity research for property/casualty insurance at Wells Fargo Securities LLC in New York, wrote in a note to clients Wednesday.

Gallagher was expected to be a leading bidder for the Willis assets, which was expected to “help them from a pricing perspective,” according to the Wells Fargo note.

“The multiples of 2.75x revenue and 10x EBITDA screen well versus the 3x revenue and double-digit EBITDA that we typically see with larger deals,” Ms. Greenspan wrote in the note.

This deal will essentially make Gallagher the “Big Three” broker to Aon and Marsh & McLennan Cos Inc., expanding its reinsurance and international presence, according to the Wells Fargo analysts.

The deal makes regulatory approval of Aon’s proposed purchase of Willis Towers Watson much more likely, “along with our expectations of significant expense savings and eventual revenue synergies (albeit with some near-term deal-related headwinds),” Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods, wrote in a note.

Aon said it still expects to achieve $800 million in cost savings through the deal.

“We suspect Aon no longer expects to meet the 0-5% and 5-10% adjusted EPS accretion originally anticipated for years 1 and 2” of the combined Aon-Willis, Mr. Shields wrote.