Two major brokerages--Willis Group Holdings Ltd. and Hilb Rogal & Hobbs Company--announced Sunday they will combine forces in a transaction that Willis said will "double Willis's North America revenues and strengthen its leadership in attractive growth markets."
Under the terms of the definitive agreement, Willis will acquire all of the outstanding shares of common stock of HRH for $46.00 per share--50 percent cash and 50 percent stock--in a transaction having an equity value of approximately $1.7 billion and an "enterprise value" of approximately $2.1 billion.
The transaction is expected to close in the fourth quarter of 2008 and is subject to customary closing conditions, including regulatory and HRH shareholder approval.
The total purchase price of $2.1 billion represents a multiple of 2.4 times estimated 2008 HRH revenues and less than 10 times estimated 2008 EBITDA (defined as earnings before interest expense, income taxes, depreciation and amortization), including the assumption of an estimated $400 million of HRH debt.
Annualized synergies are expected to amount to approximately $140 million by 2012.
Over time, Willis plans to repurchase a majority of the shares issued in connection with the transaction under its previously approved $1 billion buyback plan.
Willis expects the acquisition to be accretive to cash earnings per share from the close and to GAAP earnings per share from year two.
The new organization in North America will be renamed Willis HRH upon completion of the transaction.
It will be led by an Office of the Chairman including Don Bailey (now chief executive officer of Willis North America) as chairman and CEO, F. Michael Crowley (now president and chief operating officer of HRH) as president and Martin L. Vaughan, III (now chairman and CEO of HRH) as vice chairman of Willis Group Holdings.
"Detailed plans are being developed to combine the two companies," Willis noted in a statement. "The integration will be led by Mr. Bailey, effective immediately, to ensure a smooth and seamless process."
In addition, "consistent with the agreement that Willis reached last week with the New York State Attorney General and New York State Department of Insurance--and in keeping with Willis's commitment not to accept contingent compensation--Willis will phase out HRH's contingent commissions over three years," Willis noted in its statement.
"Combining these complementary businesses will substantially improve Willis's position in important areas in North America including California, Florida, Texas, Illinois, New York, Boston, New Jersey and Philadelphia, and in key business lines," according to the statement.
"In particular, it will more than double Willis's North America revenues in employee benefits, an already strong area of expertise that Willis has targeted for further growth," the brokerage added.
Willis said the deal "will further strengthen key practice areas including personal lines, real estate, health care, environmental, construction, complex property and executive risk."
In addition, the transaction "will greatly strengthen Willis's leadership as a middle-market broker and reinforce its large-account presence," the statement noted. "It also will further expand the range of Willis's specialty expertise and complement Willis's substantial presence in the London market."
"With a more robust and diversified platform, the combined company will deliver greatly enhanced value to clients," the statement said.
Joe Plumeri, Chairman and CEO of Willis, said "this dynamic transaction is all about growth. It's truly transformational for our North America business. Only HRH has the scale and fit in attractive growth areas to take our business to the next level."
He added that "HRH's complementary strengths and geographic footprint will help us accelerate the performance momentum we've achieved...," he said.
"It's really the best of both worlds for our clients," he added. "We bring global reach and expertise, while HRH brings added talent and local market presence. All this should translate into significant value for our shareholders."
Mr. Vaughan, chairman and CEO of HRH, said the combination has the full support of his board of directors and the senior management team at HRH.
"Our complementary footprint and Willis's strength in important global specialties such as aerospace, energy, construction, marine, financial institutions and executive risk make our two companies an outstanding strategic fit," according to Mr. Vaughan.
"We are already developing detailed plans to make sure that the integration process is smooth and seamless for our clients," he said. "We see exciting opportunities for our talented associates to enhance their careers in a truly global enterprise."
Mr. Crowley, president and chief operating officer of HRH, said that "our companies share the same culture and values--in particular an absolute commitment to serving clients, while at the same time providing an inspiring and rewarding environment for our Associates."
HRH is a leading middle market U.S.-based insurance broker with a large account portfolio, according to the joint statement, which noted that HRH generated $800 million of revenues in 2007--with $57 million from its international operations, which are based in London.
"The HRH footprint in the United States will result in a significant expansion of Willis's already extensive retail platform," said the joint statement. "The combination will boost the contribution of North America to Willis's overall revenues from 30 percent in 2007 to an estimated 45 percent on a pro forma basis, enhancing the mix among its North America, International and Global segments."
The deal, according to the statement, "also will positively rebalance Willis's business lines mix, with the reinsurance businesses--which in 2007 accounted for 15 percent of Willis's revenues--going to 12 percent of the revenues of the combined company."
The statement added that the employee benefits business will increase from 10 percent of Willis's current revenues to 13 percent of the revenues of the combined company.
Willis estimates that the transaction will be 7 percent accretive to cash earnings per share in 2009, 10 percent in 2010 and 14 percent in 2011. It is expected to be 3 percent dilutive to GAAP earnings per share in 2009, 2 percent accretive in 2010 and 6 percent in 2011.
"It is the company's intention to buy back over time the majority of the shares issued as part of the transaction," the statement noted.
Overall annualized cost savings and efficiencies are expected to amount to approximately $100 million pre-tax ($70 million after tax)--50 percent realized in 2009 and 100 percent realized in 2010.
"Implementation of 'Shaping Our Future' initiatives is expected to drive further efficiencies of $40 million pre-tax annualized by 2012," Willis said in the statement, which noted that Willis expects to incur approximately $75 million in one-time costs related to the transaction.
Under the terms of the definitive agreement, HRH shareholders can elect to receive the merger consideration in the form of cash or shares of common stock of Willis, subject to proration in order to ensure that the cash and stock elections each represent 50 percent of the total consideration paid.
In addition, the cash consideration is subject to increase to an amount above 50 percent of the total consideration (1) if the stock election represents less than 50 percent of the total consideration or (2) to ensure that the number of shares issued by Willis does not exceed 19.9 percent of the total number of shares outstanding at the effective time of the transaction.
The definitive agreement includes a "collar." Half of the value of the per-share merger consideration, or $23.00 (representing the cash component), is always fixed--whether a shareholder elects to receive cash or stock, Willis explained.
The remaining value of the merger consideration (representing the stock component) is calculated based on the average trading price of Willis common stock during the 10-day period ending two days prior to the closing date.
If the average Willis stock price during this period is greater than or equal to $31.46 or less than or equal to $40.04, the stock component is fixed and is equal to $23.00.
Outside this collar, the exchange ratio is fixed (based on the exchange ratio that would result at the top and bottom of the collar) and, therefore, the value of the stock component may be worth more or less than $23.00, based on the value of Willis common stock--again, whether or not a shareholder elects to receive cash or stock.
Depending on the Willis stock price, the merger consideration will either be an amount greater or less than $46.00 per share.
However, the value of the merger consideration (based on the ten-day pre-closing Willis trading price) will be the same regardless of whether HRH shareholders elect to receive stock or cash.
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