Fitch warns of 'lengthy and challenging' regulatory scrutiny for Aon-Willis merger deal

Fitch Ratings has revised its assessment of the world's largest insurance deal — the  mega-merger of rival brokers Aon and Willis Towers Watson — considering factors such as "execution risk" and "regulatory uncertainty".

The agency has placed 'BBB+' Long-Term Issuer Default Ratings (IDRs) and outstanding debt of Aon and its subsidiaries on rating watch negative. While the 'BBB' IDRs and outstanding debt of Willis Towers Watson (WLTW) and its subsidiaries has been placed on rating watch positive.

The two companies have entered into a definitive agreement to combine in an all-stock transaction with an implied equity value of approximately $80 billion - valuing WTW at about $30 billion. The transaction, which creates the world's largest insurance broker, is expected to complete in the first half of 2021, pending approvals from regulators and shareholders.

Fitch expects the transaction to combine two highly complementary businesses that will expand their respective product capabilities and generate significant synergies. At the same time, it has expressed concerns about the significant deal size, material execution risk, and uncertainty surrounding the regulatory outcome and Aon's ultimate long-term capital plan.

Explaining the rating action, Fitch said, "the size of the transaction creates some challenges and uncertainty in achieving these benefits. Fitch believes management of both companies' previous experience in executing material integration and restructuring increases the likelihood of achieving significant synergies going forward."

Fitch also believes that the regulatory approval of a combination of Aon and WTW will be "lengthy, challenging and uncertain and entail a degree of scrutiny around antitrust elements". It said, "regulators would have several options for potential remedies if the transaction is approved, and could potentially include modest divestitures."

The rating action for WTW reflects Fitch's view that the pro forma combined Aon entity will enhance both companies' diversification and scale and could lead to a higher IDR for WTW, in-line with Aon's current 'BBB+' rating.

Earlier this week, rating agencies S&P and Moody's also expressed concerns about the execution and integration risks involved in merging two large organisations, including potential attrition, operational disruption, and potential effects of regulatory-driven constraints.