Arthur J. Gallagher & Co. (AJG) entered into an agreement to acquire London based Giles Group of Companies (“Giles”). The transaction is expected to see light in October this year pending regulatory approval.
The all cash transaction will cost Arthur J. Gallagher & Co. £233 million or $366.4 million (£237 or $368.6 million in net cash less the value of tax and other assets acquired).
Funding the Acquisition
Arthur J. Gallagher & Co. intends to finance the deal by deploying its free cash as well as borrowings on its line of credit.
The insurance broker expects to issue long-term notes and utilize the proceedings to repay the line of credit over the following six months.
Rationale Behind the Acquisition
The acquisition of Giles, the independent retail broker in the U.K. will inflate Arthur J. Gallagher & Co.’s client base in the middle-market and enhance its underwriting footprint via current underwriting business and increased retail distribution opportunities through broker networks.
The consolidated operations will also result in longer-term operational efficiencies. The acquisition will expand its footprint in England and Scotland and make a foray into Northern Ireland, Wales, Isle of Man and the Channel Islands.
The acquisition is estimated to generate over £90 million revenue annually across the five operating units – Retail, Rossborough, Underwriting, Wholesale and Personal Lines. Additionally, it is also expected to deliver earnings before interest, tax, depreciation and amortization exceeding £30 million in 2014 and exceeding £35 million in 2015. This number excludes integration costs, which are expected to range between £1.5 million to £2.5 million per quarter through early 2015.
Following the acquisition, the consolidated operation will have nearly 70 offices and 3,100 staff in the U.K. Brendan McManus, CEO of Giles, will join the AJG International Executive Committee led by David Ross, CEO of Arthur J. Gallagher International.
Retail: Giles' retail commercial clients and networks is projected to generate more than £57 million in revenues in 40 offices annually besides leveraging Arthur J. Gallagher & Co.’s presence in the U.K. The transaction also involves Westinsure and Compass Broker Services, two UK broker networks, with a combined membership of over 200 network brokers.
Rossborough: The acquisition includes Rossborough group of companies, generating £13 million in revenues annually.
Underwriting: Revenue from this unit of Giles is estimated to generate more than £10 million in revenues annually. This unit will merge with the company’s underwriting teams to leverage its distribution platform and strengthen the product portfolio.
Wholesale: Giles' wholesale business includes a Lloyd's broker and a reinsurance business. Revenue generation is expected to be more than £5 million annually. The acquisition will aid the wholesale business come up with opportunities to distribute products via company’s underwriting and distribution platforms and thereby boost offerings to the independent brokers.
Personal Lines: This unit of Giles, offering motor, home and personal marine insurance, is projected to produce more than £5 million in revenues annually.
Inorganic Growth Story
Arthur J. Gallagher & Co.’s inorganic growth story looks impressive with the ongoing acquisitions. The acquisition of Ottawa, Ontario based Dickinson & Associates, Inc. for an undisclosed amount at the end of last month will help the company capitalize on its solid Canadian presence and solid industry relationships, thereby strengthening Gallagher’s employee benefits brokerage and consulting operations, while the acquisition of Short Hills, New Jersey based Bollinger, Inc. mid August will help to widen its Northeastern operating platform and market presence in three of its core businesses.
Additionally, in the last reported quarter, the company closed five acquisitions with annualized revenues totaling $35.9 million. The company’s strong financial position continues to support the acquisitions.
Market Reacting Positively
Share price of this insurance broker have been on a rising trend. Shares gained nearly 3% over the last 10 days. The company announced two acquisitions in the span.
Other Insurance brokers adopting inorganic growth route
Earlier, in July, insurance broker Brown & Brown Inc. (BRO) announced the closure of acquisition by merger of Beecher Carlson Holdings, Inc. Yet Marsh, a subsidiary of Marsh & McLennan Companies, Inc. (MMC) closed the acquisition of Rehder y Asociados Group, the leading insurance adviser in Peru in June.
Arthur J. Gallagher & Co. presently carries a Zacks Rank #3 (Hold). Over the last 30 days, there was no significant earnings momentum. With optimism over the current acquisitions, we expect upward revisions to the estimates to exert upward directional pressure on the Zacks Rank. In the insurance space, Everest Re Group Ltd. (RE) with Zacks Rank #1 (Strong Buy) is worth considering.
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