Analyzing AON's $13.4B NFP Acquisition Deal, Stock Declines
Aon plc AON recently agreed to buy NFP, a privately held middle-market property and casualty broker. AON is making the $13.4 billion acquisition from funds affiliated with Madison Dearborn Partners and HPS Investment Partners. Following the news, AON stock dived more than 6% yesterday.
The agreement comprises a combination of $7 billion in cash and AON stock valued at $6.4 billion. To finance the cash component of the agreement, AON plans to secure $5 billion in new debts in 2024, supplemented by an additional $2 billion raised at the deal's closure. The deal is anticipated to be finalized in mid-2024 as part of AON's strategic expansion into the middle-market sector within the realms of insurance brokerage and wealth management.
Aon's third-quarter financials reveal debt levels, with long-term debt at nearly $10 billion, short-term and current long-term debt totaling $1.3 billion and only $808 million in cash. The company's high long-term debt-to-capital ratio of 98.4%, exceeding the industry average of 47.5%, raises investors’ apprehension. Furthermore, the dilutive impact and delayed EPS accretion of the buyout may have contributed to yesterday’s stock price decline.
While the transaction is projected to have a dilutive effect on adjusted EPS in 2025, a break-even point is anticipated in 2026. Positive contributions to earnings are expected from 2027 onward, with favorable impacts on free cash flow anticipated to materialize in 2026. AON expects more than $60 million in cost synergies from the deal and more than $175 million in net revenue synergies.
Aon expects NFP to generate $2.2 billion in revenues for 2023, as outlined in an investor presentation. The company anticipates a significant increase of 14% in total revenues for both 2024 and 2025. The company foresees approximately $400 million in one-time transaction and integration costs associated with the deal. The purchase price represents 15 times the expected adjusted EBITDA.
Despite a decade of notable growth in return on invested capital to 9.1%, it remains below the industry average of 9.5%, raising questions about Aon's ability to efficiently leverage its capital for competitive returns. Following the acquisition, NFP will function as an independent yet interconnected platform.
Price Performance
AON shares have declined 2% in the past year against the 10.8% jump of the industry.
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Zacks Rank & Key Picks
AON currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader Finance space are Assurant, Inc. AIZ, Chubb Limited CB and Brown & Brown, Inc. BRO. While Assurant sports a Zacks Rank #1 (Strong Buy) at present, Chubb and Brown & Brown carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Assurant’s current-year earnings indicates a 31% year-over-year increase. It beat earnings estimates in all the past four quarters, with an average surprise of 42.4%. Also, the consensus mark for AIZ’s 2023 revenues suggests 5.4% year-over-year growth.
The consensus mark for Chubb’s current-year earnings indicates a 25.9% year-over-year increase. It beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 6.5%. Furthermore, the consensus estimate for CB’s 2023 revenues suggests 10.6% year-over-year growth.
The Zacks Consensus Estimate for Brown & Brown’s current-year earnings is pegged at $2.76 per share, which indicates 21.1% year-over-year growth. It has witnessed five upward estimate revisions against none in the opposite direction during the past 60 days. BRO beat earnings estimates in each of the past four quarters, with an average surprise of 12.3%.
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