Analysts at KBW have pointed to Arthur J Gallagher as a likely buyer of Willis Re, if the investigation currently being carried out by EU regulators forces Aon and Willis Towers Watson (WTW) to make divestitures ahead of their planned merger.
The European Commission (EC) confirmed last month that it had opened an “in-depth investigation” into the Aon / WTW deal to determine whether the combination could have any negative effects on competition.
WTW has already sold off its Miller arm ahead of its takeover by Aon, possibly to avoid any regulatory challenges on competitive grounds. And some commentators have also suggested that WTW could have to consider options for its reinsurance broking arm, Willis Re.
But KBW believes that any further divestitures would “limit the ultimate expense savings” offered by the merger, particularly in light of Aon’s margin expansion track record.
That said, if the EC’s investigation does require Aon and WTW to make divestitures to complete the merger, KBW sees Willis Re as the most likely candidate, given the high level of concentration in the reinsurance brokerage market.
Market leaders Aon and Marsh & McLennan also both break out their reinsurance revenues, analysts noted, thereby creating easily identifiable segments.
In the event of a Willis Re sale, KBW sees Arthur J Gallagher as the best fit for new ownership, reflecting its existing size and international footprint, and its already-successful re-entry into reinsurance brokerage, beginning with a joint venture in 2013.
However, it added that several other large private-equity backed and privately-held insurance brokers could emerge as bidders.
“If AJG buys Willis Re, we think it could very effectively compete with AON and MMC’s Guy Carpenter within reinsurance brokerage, while strengthening its relationships with – and understanding of – many of the insurance carriers for whom it currently provides primary insurance brokerage,” KBW explained.
It remains worth noting that Aon’s management team currently still expects to buy all of WTW with an H1 2021 close and no significant divestitures, despite the regulatory concerns.
“We think AON’s preference is to buy all of WLTW, including Willis Re, which would provide more opportunities for both revenue … and expense cuts,” KBW concluded.
Assuming that Aon and WTW complete their merger by the end of June, KBW expects Aon to realize $434 million of expense synergies in 2022 and $700 million in 2023, partly offset by $133 million of annual retention expenses.
Analysts also assume that Aon can fully realize its initial expense synergy guidance even if it sells Willis Re, given its track record of outperforming initial savings guidance.
It’s estimated that Aon could sell Willis Re for 13.0x its 2022 EBITDA, reflecting the scarcity value of established global reinsurance brokerages balanced against the relatively limited pool of buyers and the forced nature of this potential divestiture.
The EC has 90 working days to conclude its investigation, which must end by May 10th 2021.
Some commentators have warned that this could potentially push back the completion date of the merger, but Aon has maintained that the transaction is still forecast to close within the first half of the year.