As the U.S. Department of Justice (DOJ) sues to block the combination of global re/insurance brokers Aon and Willis Towers Watson (WTW), analysts at KBW view additional divestitures as a more likely outcome than the deal falling apart completely.
Previous reports that the DOJ was likely to approve the $30 billion mega-merger appear to have been false, as the U.S. regulator looks to block the deal on the grounds it threatens to eliminate competition and increase prices, among other concerns.
In a joint statement, Aon and WTW noted their disagreement with the decision. But as explained by analysts, their response included no specific plan of action, which, analysts say could include litigation, additional divestiture, or abandoning the deal.
“We cannot project any litigation’s likely success, but we think that additional divestitures are more likely than AON abandoning the deal and paying WLTW the $1 billion break-up fee,” say analysts.
Currently, KBW sees “very little likelihood of the deal breaking absolutely,” a move which would see Aon pay a steep termination fee to WTW.
At Aon, analysts feel that senior leadership is fully capable of extracting significant value from a deal conveying much lower revenues that WTW’s $9.35 billion, and believes that the broker’s management structure and employee remains mostly intact.
However, analysts are concerned about WTW as the company has lost a large volume of talent following the merger announcement, with “no obvious successor to current CEO John Haley.”
Despite their concern, complete deal abandonment is the less likely outcome, suggest analysts, with further divestments to appease regulatory concerns in the U.S. viewed as more likely.
As we wrote earlier, one of the main concerns of the DOJ is Aon and WTW’s 40%+ domestic market share in large-account P&C and employee benefits brokerage.
Critically, say analysts, the DOJ acknowledges that proposed divestitures in the U.S., notably Willis Re, its U.S. retirement business and the Aon Retiree Health Exchange, would alleviate its concerns in those markets.
“We infer that additional large-account P&C and EB divestitures would similarly satisfy the DOJ,” say analysts.
Offloading large blocks of large-account brokerage would likely be a challenge, but KBW notes that previously announced divestments of WTW’s San Francisco and Houston offices suggests that it can be done.
“More importantly, we see a lot of potential strategic buyers – including both publicly-traded and private equity-backed insurance brokers – for such blocks, which could translate into better sales prices notwithstanding the obvious time constraints.”
On the potential for litigation, KBW says that it does not know how to forecast the likely outcome of Aon challenging the DOJ in court, but warns that “litigation seems very likely to prolong the deal’s uncertainty, which would probably lead both employees and clients to seek stability elsewhere.”