Rating agencies give thumbs-up to Aon-Willis deal — but warn of integration risks

Following an in-depth business and financial review, ratings agencies are largely of the view that the  merger between Aon and Willis Towers Watson (WTW) will be good for both companies as it will strengthen their respective market positions and expand product capabilities across all business lines. However, the group may face execution and integration risks, including potential attrition.

On March 9, the two brokers made a shock announcement that they are merging in an all-stock transaction valued at approximately $80 billion, with Aon's shareholders owning 63% and WLTW shareholders 37% of the combined company.

The combination of Aon and WLTW will be the world's largest insurance brokerage and consulting firm, with pro forma revenue of about $20 billion and pro forma net income of $3.6 billion based on 2019 results, according to Moody's. Aon is currently the world's second-largest and WLTW the third-largest insurance brokerage firm by revenue.

Moody's Investors Service has maintained a stable rating outlook for Aon despite the significant execution and integration risk involved in merging two large organisations. At the same time, the agency has changed the rating outlook on WTW to positive from stable based on the view that it will be part of a larger organisation with stronger operating margins and credit metrics.

S&P Global Ratings has said that the deal will have no immediate effect on Aon's ratings, and placed WTW on CreditWatch with positive implications. The agency believes that this business combination will create a "more-complete insurance broker" in the large account and middle-market space.

"We think that if this deal closes, it has the potential to enhance Aon's business profile by strengthening its middle-market presence significantly while enhancing its overall scale, product depth, and operational capabilities," S&P said. "Mitigating concerns include integration risks associated with its transformational nature, revenue dis-synergies, key personnel loss, operational disruption, and potential effects of regulatory-driven constraints."

S&P noted that If the transaction does not close, it will likely remove the ratings from CreditWatch and assign a stable rating outlook.

Moody's said that Aon has improved its EBITDA and free cash flow in recent years through acquisitions, organic growth and a three-year restructuring plan that was completed by the end of 2019. Its ratings reflect its global market presence; diversification across clients, products and regions; and expertise in providing risk, retirement and health solutions to middle-market, national and global clients.

"The combination will strengthen their respective market positions in the US, the UK and Europe, and it will expand their respective product capabilities across their major business lines of commercial risk, retirement, health, reinsurance and data and analytics," it said.

Expressing concerns about the execution and integration risks involved in merging two large organisations, Moody's said that "Within the first three years after closing, the group expects to spend about $2 billion in one-time integration, retention and transaction costs to achieve run-rate savings of about $800 million per year. While the integration effort will weigh on the group's earnings and cash flow, Moody's expects it will emerge with a debt-to-EBITDA ratio in the range of 3.0x-3.5x (including Moody's standard accounting adjustments for pensions and leases)."

Moody's stated that a "successful integration with WLTW" is among the factors that could lead to a rating upgrade for Aon, while a "significant disruptions related to the proposed merger" could result in a rating downgrade, among certain other factors.

Both the parties aim to complete the transaction in the first half of 2021, pending approvals from regulators and Aon and WLTW shareholders.