Analysts at KBW have modelled the potential impact on Aon and Willis Towers Watson (WTW) if their pending merger deal were to collapse.
The firm believes that the brokers will ultimately end up selling more businesses to satisfy ongoing regulatory concerns, but the deal is currently facing significant roadblocks, including a civil antitrust lawsuit by the DOJ.
KBW’s earnings per share (EPS) estimates for Aon remain unchanged for now, assuming levels of organic revenue, adjusted EBITDA margins and share repurchases do not deviate from expected levels over the next three years.
The biggest risk to Aon of the deal breaking is linked to its share repurchases, since analysts note that a deal break on regulatory antitrust concerns would probably require it to pay the $1 billion termination fee.
Aon repurchased about 229,675 shares for about $50 million in Q1 2021 and about 400,000 shares estimated for just under $100 million in Q2, implying just over $5.1 billion on its current repurchase authorization.
Notwithstanding an unsuccessful deal’s potential reputational impact, KBW believes that CEO Greg Case’ and CFO Christa Davies’ successful track records of organic revenue growth and steady margin expansion would warrant a forward cash P/E in line with MMC’s current roughly 21.0x.
Turning to WTW, analysts say that the biggest impacts of a deal break would be lower organic revenue growth and margins than we currently model, offset by potentially-significant share repurchases.
“Although we struggle with quantification, we expect substantial recent and ongoing producer departures to meaningfully pressure WLTW’s organic revenue growth in 2022 and 2023, reflecting both less new business (because there’s less personnel to pursue it) and lower renewal revenues (since departed employees will likely eventually pursue some of their old accounts),” they stated.
“In the same vein, we think that lower revenues and the need to bolster employee retention and to replace already-lost talent in what would (at least initially) be a less certain working environment – starting with WLTW CEO John Haley’s presumed retirement – would probably pressure margins, which we crudely estimate at an adverse 100-150 bps relative to our current 2022E.”
Aon was cleared to move ahead with its acquisition of WTW by the European Commission last week, in an agreement that was dependent on a significant number of concessions aimed at boosting competition elsewhere in the sector.
Elsewhere, regulators in Singapore and Australia have all extended their review process for the merger, while South Africa and New Zealand have asked for further divestments to meet competition standards.
