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Gallagher negotiates biggest M&A deal quickly, virtually

Posted On: May. 14, 2021 11:34 AM CST

J. Patrick Gallagher

Arthur J. Gallagher & Co. is used to buying and integrating rival brokers, having completed more than 500 transactions over the past 20 years, but its agreement this week to buy a slew of Willis Towers Watson PLC assets for $3.57 billion is in a different league, its top executive says.

And the process was 100% virtual.

“That’s not comfortable for me,” J. Patrick Gallagher Jr., chairman, president and CEO of Gallagher, said in an interview Thursday. “I am a guy that likes to do dinner and likes to sit around in your office and look at you when I ask, ‘Do you want to do this deal?’”

But amid the ongoing pandemic the Gallagher acquisition team was able to connect virtually with Willis leaders and others over a six-to-eight-week period to discuss their expectations, possible other moves and opportunities the Willis staff could have with Gallagher, he said. “We did it virtually, and I think we did it very well,” he said.

The deal, which Mr. Gallagher describes as “seminal” for the brokerage, is Gallagher’s largest since it was founded more than 90 years ago and significantly expands its reinsurance and international operations. Gallagher will acquire Willis businesses generating about $1.3 billion in annual revenue.

Analysts commenting on the deal were largely positive, saying the pricing ratio of 10 times earnings was relatively low and the opportunistic purchase will enable Gallagher to compete more effectively with it larger rivals.

The opportunity for the deal arose when regulators in Europe, the United States, Australia and Singapore raised antitrust concerns over Aon PLC’s agreement last year to buy rival Willis. That deal, which is expected to be completed in the second half of 2021, will propel Aon from the world’s second-largest brokerage to the largest, ahead of Marsh & McLennan Cos. Inc. If the deal had gone ahead unchallenged, it would also have left the reinsurance market with just two big reinsurance brokers, with the Aon-Willis operations significantly larger than Marsh McLennan’s Guy Carpenter & Co. LLC reinsurance broking unit.

Gallagher started a reinsurance brokerage operation from scratch 15 years ago, but it was not successful. It had more success with a 2013 collaboration with former Benfield Group Ltd. CEO Grahame Chilton. Gallagher took full control of the joint venture in 2020 and rebranded it Gallagher Re. It climbed to be the fifth largest reinsurance brokerage but remained a fraction of the size of Aon, Guy Carpenter and Willis.

“This puts us at the table. We are going to be in the top three,” Mr. Gallagher said.

The deal to buy much of Willis Re will add to Gallagher Re about $750 million in annual reinsurance brokerage revenue, about 2,300 staff and operations in 27 countries. Gallagher Re will remain some distance behind Guy Carpenter and Aon Re in size but it will be several multiples bigger than other reinsurance broking rivals.  

The reinsurance broking business holds various attractions, Mr. Gallagher said.

Reinsurance is “at the heart of capital formation and capital preservation and management for the trading partners we have” and having reinsurance capabilities helps Gallagher provide services to those insurers, Mr. Gallagher said.

In addition, the reinsurance market is a “hub of creativity,” providing capacity to cover emerging and large risks and additional capacity for Gallagher’s existing managing general agency business, and the purchase will provide Gallagher with additional data and analytics capabilities, he said.

“Especially for large multinational risk management accounts, knowing what’s going on in the reinsurance market makes a difference,” Mr. Gallagher said.

While the discussions with Aon began around the sale of reinsurance broking business, the purchase of the other Willis assets, including Gras Savoye SAS in France, will also speed Gallagher’s growth, he said.

“Our strategy for Europe has been advanced by five years. I think we are getting the best name and the best broker in France,” Mr. Gallagher said.

Operations in other European countries, including Germany, the Netherlands and Spain, also offer “a good indigenous presence; and there’s a great opportunity to continue doing bolt-on acquisitions,” he said.

Gallagher began a significant international expansion seven years ago with deals in Australia and the United Kingdom.

Willis broking operations that Gallagher is buying in the United Kingdom, the United States and Bermuda will be merged into Gallagher’s existing businesses.

Depending on regulatory requirements, the sale, which is contingent on the Aon-Willis deal being completed, could include more Willis business.

“Typical of these remedy programs there is an accordion feature, which means they can put to us other operations that may be troublesome for the (Department of Justice), and we’ve agreed up front to take those. … That’s limited to $200 million in revenue,” Mr. Gallagher said.

The agreement to buy such a large swathe of businesses in one deal will not affect Gallagher’s traditional acquisition strategy, in which it acquires dozens of smaller brokers a year, Mr. Gallagher said.

“Our tuck-in acquisition strategy is what is building the company globally, and it works,” he said.

Gallagher is raising debt and equity to help fund the Willis deal.