Marsh makes big bet on growth

Marsh & McLennan’s (MMC) management waited years for an opportunity to acquire its competitor JLT. This moment has now arrived.

MMC has agreed to acquire Jardine Lloyd Thompson Group (JLT) for roughly $5.6 billion. While executives believe the deal offers a unique opportunity to grow in new geographies and lines of business, some market observers are baffled by the amount of debt that MMC is taking on to shoulder the transaction.

“The acquisition of JLT creates a compelling value proposition for our clients, our colleagues and our shareholders,” said Dan Glaser, chief executive officer of MMC, during an investor call discussing the deal in September.

“JLT skews into higher growth areas; it should provide a lift over time.”

While suggesting that organic growth of the combined group could potentially cross the 5 percent level, Glaser noted that “JLT consistently has outgrown its competitors organically and we would expect that to continue as a combined business”.

“JLT is a company that punches above its weight. On any given day they could have beaten any broker on an account. They are highly skilled, highly motivated, highly specialised.

“When I look at it it’s a tremendous injection of power. It absolutely accelerates our aspirations,” Glaser continued.

A long track record

JLT was created in 1997 when Jardine Insurance Brokers, which was formed almost 50 years ago, merged with Lloyd Thompson Group. Headquartered in London, the firm now operates in 40 countries with particular strength in the UK and Australia as well as in key emerging markets across Asia and Latin America.

Through its specialty business, JLT provides risk and insurance broking advice to energy, mining, healthcare, construction, marine, and aerospace sectors as well as in financial lines, political risk and trade credit.

The company operates through two divisions: risk & insurance and employee benefits. The risk & insurance division contributed 77 percent to group revenues in 2017 and delivered organic revenue growth of 5 percent in 2017, according to the annual report.

JLT has been building out its US specialty platform while making investments to strengthen its representation in continental Europe.

A re-examination of the group’s strategy carried out in 2017 recognised JLT’s international development needs and opportunities, including in the US, where its representation was expected to enable JLT to move from an international to a global business.

As part of this strategy, the review suggested a simplification of the business and management structure. From April 2018, JLT’s regional insurance broking operations were brought together into an integrated specialty division. The group’s businesses were divided into three divisions: reinsurance, specialty and employee benefits.

“JLT rearticulated its mission: ‘to become the leading global specialist risk adviser and broker’,” CEO Dominic Burke said in the firm’s 2017 annual report.

MMC is significantly bigger than JLT. In 2017, MMC recorded revenues of $14.02 billion and a net income of $1.49 billion. This compares to a revenue of £1.39 billion ($1.8 billion) and a net profit of £118.4 million ($155 million) at JLT during the period.

“Our acquisition of JLT represents a meaningful step forward in our efforts to expand in higher growth and higher margins segments,” Glaser explained.

“JLT makes us stronger in specialty risk broking with deep expertise and capabilities in areas such aerospace, energy and construction. They make us stronger in markets such as the UK and Australia. They add to our propositions in key growth markets such as Asia and Latin America.

“They provide further scale and skills to our global reinsurance business and they increase our retirement and benefits presence around the world, especially in the UK,” he said.

For Glaser, the acquisition also offers the opportunity to enhance several areas of JLT’s business including accelerating growth in global employee benefits and its developing US footprint.

“JLT accelerates our strategy to drive higher revenue growth by pushing MMC further into faster growing geographies and market segments while enhancing our capabilities,” Glaser said.

A debt-financed transaction

MMC has to finance the $6.4 billion it is paying to acquire JLT mostly through debt. The transaction will be funded by a combination of cash on hand and proceeds from debt financing. The total cash consideration would be $5.6 billion in fully diluted equity value while the total estimated enterprise value is $6.4 billion.

To shoulder the acquisition, MMC has committed to bridge financing from Goldman Sachs. The bridge loan agreement provides for commitments in the aggregate principal amount of £5.2 billion ($6.8 billion) and will mature within 364 days after the borrowing date.

The borrowing under the bridge loan agreement bears interest at the London Interbank Offered Rate plus an applicable margin based on the company’s public debt ratings. The loan agreement also provides for unused commitment fees based on the company’s public debt ratings and duration fees equal to 0.5 percent per annum 90 days after the closing date, 0.7 percent per annum 180 days after the closing date and 1 percent per annum 270 days after the closing date, of the aggregate principal amount of the advances and commitments of each lender outstanding at the close of business on such date.

MMC intends to work over the next months on ways to replace the bridge facility with more permanent financing prior to the expected closing of the transaction in Spring 2019, chief financial officer Mark McGivney explained during the call.

During the call, analysts asked about a potential downgrade of MMC by rating agencies due to the significant rise in debt and how MMC would deal with it.

“We are at the very beginning stages of speaking with them,” McGivney said. “We maintain a very active dialogue with them and we will be working through this. We were very thoughtful about how we develop this financing plan and the capital management plan around this and we believe it is consistent with maintaining a strong ratings profile.

“Although initially our leverage ratios will increase, the substantial cash flow that we expect to generate as well as increases in debt capacity to earnings growth will enable us to bring our leverage ratios back in line with what we see as levels consistent with maintaining a strong ratings profile,” he noted.

A few days after the deal was unveiled, Fitch Ratings placed the ratings of MMC on Rating Watch Negative, reflecting the expected increase in near-term debt and related increase to financial leverage as measured by debt to earnings before interest, tax, depreciation and amortisation (EBITDA), which would climb above levels acceptable for the current rating category. Increased debt will also result in lower interest coverage, Fitch noted.

Management is confident

During the call, McGivney expressed confidence that MMC will be able to manage the debt burden. “We have been maintaining substantial balance sheet flexibility in order to position us with just this type of opportunities,” he noted.

“We value our high-quality ratings and the financing and capital management plan contemplated in the transaction is consistent with maintaining solid ratings,” he added.

After the deal’s expected closure in the spring, Glaser plans to gather groups of people from both companies together to discuss the best way of approaching the market. He believes that the combination of the businesses will strengthen the group’s regional capabilities.

“There are very few transactions we’ve done that hit on every point of our philosophy,” Glaser said.

The transaction will also strengthen MMC’s reinsurance operations. “When we look at JLT Re it’s about $280 million, Guy Carpenter is nearing $1.2 billion. It’s a nice addition to Guy Carpenter in terms of skills,” he noted.

Glaser also suggested that there will be synergies to be lifted from the combined operations and that costs will be reduced.

“We are in the same businesses in certain areas. There are going to be duplications and overlaps,” Glaser said.

As JLT and MMC are both publicly listed, Glaser expects that costs related to the listing can be reduced. Other areas where the combination of the firms can offer cost reductions include real estate, technology and infrastructure, he noted. Furthermore, as both firms use vendors and outside services, these can also be combined, Glaser suggested.

In addition, functional back office areas present some overlap in areas like finance, legal, human resources (HR), compliance, service centres and call centres, which may be combined, Glaser explained.
In order to reduce staff, the group may not replace employees who leave the company, but overall, the transaction is about growth, he noted.

Glaser said that the MMC board had watched JLT for some time, waiting for an opportunity to take it over.

“I would have preferred to acquire them a couple of years ago since their stock has such a run-up as they realise some of the benefits of their strategy,” Glaser said—but MMC wanted to transact through a friendly takeover.

“It really needed that both sides thought the timing was right,” he concluded.