Aon-Willis deal will generate $800m of annual cost synergies

A  combined Aon-Willis Towers Watson would benefit from some $800 million of annual pre-tax cost synergies by the third full year of trading, according to a presentation detailing the terms and logic of the deal.

The companies have also budgeted for integration costs of some $1.4 billion spread across the first three years with some 20 percent of these absorbed in operating expenses. It anticipates these costs will be $700 million in the first year, $490 million in the second year, and $210 million in the third year.

It also expects retention costs to reach some $400 million spread evenly over the three years, which would be absorbed in operating expenses.

The combined firm will maintain guidance of mid-single-digit or greater organic revenue growth.

The companies said the transaction will be accretive to Aon adjusted EPS in year one and it expects peak adjusted EPS accretion to be in the high teens after the full realisation of expected synergies.

The transaction will contribute to long-term, double-digit free cash flow growth for the combined firm, enabling ongoing investment in “innovative content, capabilities, and client solutions”, the firms said. Free Cash Flow is expected to breakeven in year two and free cash flow accretion of over 10 percent is expected after full realization of expected synergies.

Based on their 2019 reported financials, the firms will have combined revenues of $20.1 billion (Aon posted revenues of $11 billion in 2019 and Willis revenues of $9.1 billion), adjusted operating income of 4.9 billion (Aon $3 billion and Willis $1.9 billion), adjusted net income of $3.6 billion (Aon $2.2 billion and Willis $1.4 billion), and free cash flow of $2.4 billion (Aon $1.6 billion and Willis $0.8 billion).

Christa Davies, the chief financial officer of Aon and the combined firms, said on a conference call discussing the deal that the transaction is attractive based on the cost synergies alone but that the firms also anticipate an upside for revenues based on the firms’ complementary offerings.

“This is an exciting next step for Aon which will accelerate innovation unlock value for stakeholders,” Davies said. “We are experienced at implementing big transactions. This is about client benefit and seen as beneficial to clients over time, thanks to the combined talent, innovation, and investments in technology. We believe the businesses are complementary – by client and segment.”

The deal will see each Willis Towers Watson share exchanged for 1.08 shares of Aon at a fixed exchange ratio. Aon shareholders will own approximately 63 percent of Aon, and Willis Towers Watson shareholders will own approximately 37 percent on a fully diluted basis.

Upon completion, the combined firm will go to market under the Aon brand, and will maintain operating headquarters in London, UK.

The merged company will be led by Aon CEO Greg Case and Aon CFO Davies.

John Haley, CEO of Willis Towers Watson, will take on the role of executive chairman "with a focus on growth and innovation strategy".

The board of directors will comprise proportional members from Aon and Willis Towers Watson’s current directors.

The transaction is expected to close in the first half of 2021, subject to regulatory and shareholder approvals and other customary closing conditions.

The transaction will be effected by an Irish scheme of arrangement.