Aon hopes $3.5bn Willis-Gallagher deal will appease EC’s antitrust concerns

Broker  Willis Towers Watson will be broken up and large parts of it including a substantive part of its reinsurance operations sold to  Arthur J. Gallagher & Co in a move designed to smooth the way for  Aon’s acquisition of the business.

It is hoped the deal with help Aon secure a green light from concerned regulators. A number have expressed antitrust-related worries relating to the deal, most notably the European Commission. In April, the two brokers said they were developing a remedy proposal to alleviate these concerns.

The European Commission was reported to be on the verge of publishing a statement outlining all its fears. This prompted the firms to prepare a package of remedies designed to negate the need for this to be published at all.

Now, what would appear to be the guts of those reforms as been revealed. Arthur J. Gallagher will acquire certain parts of Willis’s reinsurance, specialty and retail brokerage operations in a $3.5 billion deal expected to close during the second half of 2021.

The proposed deal is subject to European Commission, US Department of Justice and other regulatory approvals, including regulatory approvals related to the pending Aon and Willis Towers Watson combination and the proposed remedy. That could mean the regulators may still have an important say on the future of all three businesses.

The operations include certain of Willis Re's treaty and facultative reinsurance brokerage operations and certain UK specialty, European and North American brokerage operations. The combined units generated $1.3 billion of estimated pro forma revenue and $357 million of estimated pro forma EBITDAC for the year ended December 31, 2020.

The reinsurance brokerage operations being sold, which include both treaty and facultative reinsurance, generated approximately $750 million of estimated pro forma revenue for the year ended December 31, 2020. The business represents over 750 insurance and reinsurance company clients, across more than 25 countries, and places over $11.5 billion of premium annually.

The UK and European brokerage operations generated approximately $500 million of estimated pro forma revenue for the year ended December 31, 2020. European retail brokerage includes certain operations in Germany, Netherlands, Spain and France, including the vast majority of French insurance broker, Gras Savoye. Specialty operations in the UK principally include cyber, space and aerospace products.

The North American brokerage operations generated approximately $50 million of estimated pro forma revenue for the year ended December 31, 2020. This includes certain property/casualty brokerage business from predominantly middle-market and large-account clients located in select markets such as San Francisco, Houston and Bermuda, across niches such as construction and energy.

Under the agreement, Gallagher will acquire the combined operations for gross consideration of $3.57 billion. Gallagher expects to finance the transaction using a combination of long-term debt, short-term borrowings, free cash and common equity. It said that the final funding arrangement contemplates Gallagher maintaining its investment grade debt rating.

Gallagher said integration is expected to take approximately three years with total non-recurring integration costs estimated to be approximately $350 million. After giving effect to these assumptions and pro forma results discussed above, the acquired operations would have been approximately 9 percent to 11 percent accretive to Gallagher's 2020 adjusted GAAP EPS excluding earnings from clean energy investments.

"This acquisition will accelerate our long-term strategy by significantly expanding our global value proposition in reinsurance, broadening our retail brokerage footprint and strengthening key niches and specialty brokerage offerings," said J. Patrick Gallagher Jr, chairman, president and CEO.

"The powerful combination of expertise, geographic reach and scale that this acquisition presents will greatly enhance our offerings to clients and prospects, while also providing significant value for our colleagues, carrier partners and shareholders. Most importantly, I look forward to welcoming more than 6,000 new colleagues to our growing Gallagher family of professionals."

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.