S&P Global Ratings has revised the outlook for Aon PLC from stable to negative following the company’s definitive agreement to acquire U.S. middle-market broker NFP Holdings LLC.
Despite the strategic benefits of the acquisition, the negative outlook reflects concerns about the significant increase in debt to fund the transaction.
Aon’s acquisition of NFP, valued at over $2 billion in revenue, is viewed as strategically sound and opportunistic, positioning Aon as a major player in the highly fragmented U.S. middle market, the rating agency noted.
The rating agency acknowledges the risks associated with such a large transaction, including operational disruption, management distraction, integration issues, and potential staff turnover.
S&P Global Ratings expects Aon to mitigate these risks by maintaining NFP as a largely independent but connected platform, leveraging synergies through combined back-office services and cross-sell opportunities.
While credit metrics are expected to be weak initially, with adjusted debt to EBITDA and funds from operations (FFO) to debt ratios below peers, S&P Global Ratings anticipates improvements within the next two years.
Aon plans to fund the acquisition with approximately $7 billion in debt and $6.4 billion in Aon stock, with the transaction expected to close in mid-2024.
The negative outlook reflects concerns about Aon’s ability to reduce leverage in line with S&P Global Ratings’ base-case expectations within two years of the transaction’s close.
Downside scenarios include a more aggressive financial policy or underperformance, leading to credit-protection measures not improving to rating-appropriate ranges.
An upside scenario could involve revising the outlook back to stable within 24 months if Aon successfully reduces leverage, maintains healthy organic growth, and executes the NFP transaction as planned.
Regulatory hurdles or unexpected events could also impact the outlook, the rating agency said.
