Arthur J. Gallagher & Co. AJG agreed to buy certain reinsurance, specialty and retail brokerage operations of Willis Towers Watson plc WLTW for $3.57 billion. Pending regulatory approvals, the transaction is expected to close during the second half of 2021.
The transaction includes certain of Willis Re's treaty and facultative reinsurance brokerage operations, as well as certain U.K. specialty, European and North American brokerage operations. The operations together generated $1.3 billion of estimated pro forma revenues and $357 million of estimated pro forma EBITDAC in 2020. Willis Towers had agreed and entered into an agreement to merge with Aon AON in an all-stock deal in March last year.
Financing the Deal
Arthur J. Gallagher intends to fund the acquisition with a combination of long-term debt, short-term borrowings, free cash and common equity. The company had more than $1.6 billion of available liquidity at first-quarter 2021 end.
Rationale of the Transaction
Arthur J. Gallagher believes addition of these Willis Towers’ operations to its portfolio will help it expand its global value proposition in reinsurance as well as global presence in retail property casualty and health & benefits brokerage. The acquisition will also help the acquirer consolidate niche and specialty brokerage offerings like energy, construction, cyber, space, and aerospace products.
This Zacks Rank #2 (Buy) insurance broker estimates the integration to take about three years. Non-recurring integration costs are projected to be about $350 million. The acquirer expects the acquisition to have been accretive to Arthur J. Gallagher's 2020 adjusted GAAP EPS excluding earnings from clean energy investments by 9% to 11%.
Impressive Inorganic Growth
Arthur J. Gallagher’s revenues are geographically diversified with strong domestic and international operations. International operations contribute about one-third of revenues. The insurance broker completed and integrated 600 acquisitions from Jan 1, 2002 through Dec 31, 2020, most of which were within its brokerage segment. In first-quarter 2021, the company completed five mergers, representing about $90 million of annualized revenues.
The company’s merger and acquisition pipeline is quite strong with about $250 million of revenues, associated with about 40 term sheets either agreed upon or being prepared. The company expects a very active 2021, particularly in the United States due to concerns related to possible tax changes. The company targets about $2.5 billion of mergers and acquisitions with free cash and debt in 2021.
Shares of Arthur J. Gallagher have rallied 16.3% year to date, outperforming its industry’s increase of 14.6%.
Acquisition in the Same Space
Marsh & McLennan Agency LLC, the middle market agency arm of Marsh & McLennan Companies MMC, acquired PayneWest Insurance, which is one of the largest independent agencies in the United States. The transaction is in tandem with the company’s strategy to boost its presence across the United States. It has been putting in efforts to cater to midsize organizations and individuals for the past many years.
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