Rating agency Fitch has decided to place the ratings of re/insurance broker Aon on negative watch due to complexities surrounding its recently announced merger deal with Willis Towers Watson (WTW).
Analysts said Aon’s ‘BBB+’ Issuer Default Rating (IDR) could be negatively affected by the significant deal size of its combination with WTW, as well as material execution risk, and uncertainty surrounding the regulatory outcome.
At the same time, Fitch has put WTW’s ‘BBB’ IDR on positive watch due to the improved diversity and scale promised by a combination with Aon.
Scheduled for completion in the first half of 2021, the Aon/WTW transaction will produce the world’s largest re/insurance broking and consulting firm, with pro forma revenue of about $20 billion and pro forma net income of $3.6 billion based on 2019 results.
Fitch acknowledged that the deal provides both companies with the opportunity to expand and further accelerate their growth strategies, with $800 million of synergies and cost reductions also predicted to be achieved by the third full year of combination.
However, it added that management are also expecting to incur approximately $1.4 billion in integration costs and $400 million in retention costs in the three year post-closing.
The size of the transaction will also create some challenges and uncertainty in realising any benefits, although Fitch did note the previous experience of both companies in integration and restructuring efforts.
Fitch’s view contrasts somewhat with that of fellow rating agencies Moody’s and S&P, who both maintained a stable outlook on Aon following the merger announcement, while also taking a positive view on WTW.
But all three firms recognised that regulatory approval for the deal could be a lengthy and challenging process, with some potential issues around antitrust elements.
WTW has already confirmed that it is exploring “strategic alternatives” for its wholesale broking arm, Miller, in what could be seen as pre-empting anti-trust concerns, while analysts at Wells Fargo Securities have suggested that Willis Re could soon be on the table.
