GS Capital Partners' $1.4 billion deal to purchase the USI Holdings Corp. brokerage reflects the private equity market's growing interest in the insurance industry in general, and the brokerage side in particular, and might harbinger more deals before year's end, analysts say.
Nearly three months after announcing it was exploring the possibility of going private, the Briarcliff Manor, N.Y.-based insurance broker entered into a definitive purchase agreement with GS Capital, a private equity affiliate of Goldman, Sachs & Company.
USI stockholders will receive $17 in cash for each share of USI common stock. Under the agreement, GS Capital would also repay approximately $300 million of USI's existing debt obligations.
"After careful analysis, the special committee and board have endorsed this transaction as being in the best interest of our stockholders," David Eslick, USI's chairman and chief executive officer, said in a statement. "Our new partner is a world-leading private equity firm that believes in our commitment to investing in our people, and is committed to working with us to deliver the most value for our clients and customers."
"Goldman Sachs has a long and successful record of investing in the financial services industry," said Henry Cornell, a managing director at GS Capital. "We look forward to investing in the continued growth of USI in this next chapter."
Shareholders will receive $992.8 million for the 58.4 million shares of company stock outstanding.
Should the deal not go through, depending upon the circumstances of the failure, USI could end up paying GS Capital $41 million, or GS Capital could owe USI $25.7 million in termination fees, according to a filing with the Securities and Exchange Commission.
Donald Light, senior analyst with Boston-based Celent, said that while USI's sale comes as no surprise, there were two points worth noting about the deal.
One is that private equity firms are looking to invest in industries that are undergoing change, and the insurance brokerage business certainly meets that standard, he observed.
Second, USI has not been implicated in the contingency fee scandal impacting mega-brokers such as Marsh and Aon, and subsequently has not had to give up any of its contingent commission revenues.
"Private equity firms are awash in cash right now, and because of the upheavals in the insurance brokerage business, it has become very attractive to them," said Mr. Light.
While he did not expect to see a rash of private equity buyouts, he said he would not be surprised if there were one or two more this year outside of the top three brokerages.
The advantage for USI, he added, is that it can continue with its strategy of acquiring more small independent agencies with additional funding from its private equity backers, and not have to worry about the impact of those acquisitions on its income statement from public investors.
David Lewis, an analyst with SunTrust Robinson Humphrey in Atlanta, said this was a positive move for the broker. The firm would now be able to finalize integration and margin expansion plans quicker as a private company "with cheap capital," while continuing to pursue its acquisition strategy, he pointed out in his analyst's note. He said no other bidders are expected.
USI has struggled to meet analysts' revenue and earnings forecasts, Mr. Lewis noted, causing the firm to trade "at a significant discount to its peers. We continue to view USI as having an attractive business model."
Mr. Lewis told National Underwriter he did not expect to see massive acquisitions of public insurance brokers, but expects continued consolidation of brokers with revenue between $1 million and $10 million.
John Wepler, president of the agency consulting firm Marsh, Berry & Company in Concord, Ohio, said GS Capital paid "a pretty healthy price" for USI, which is a strong indication the private equity firm feels USI can achieve substantial growth as a private company. He calculated that GS Capital is paying 2.45 times revenue and 42.5 times earnings based on the past 12 months for USI.
By comparison, he noted, in three significant acquisitions over the past 10 years–Marsh & McLennan's purchase of Johnson & Higgins in 1997, Hilb Rogal & Hamilton's acquisition of Hobbs Group (now renamed Hilb, Rogal & Hobbs) in 2002, and BB&T's purchase of McGriff Seibels & Williams in 2003–the average purchase price came to 2.5 times revenue and 23.7 time earnings over 12 months.
"[They] feel they can grow earnings rapidly, and the price must be worth it," said Mr. Wepler. "This is just another example of the massive movement of private investment being channeled to the insurance distribution system."
Rating agencies Fitch Ratings and Standard & Poor's weighed in on the acquisition–not to downgrade USI's credit rating, but to issue a note of caution about the deal.
Fitch estimates USI's debt to be closer to $380 million, and placed the "double-B-minus" rated firm on "rating watch evolving." Details of the deal that have yet to be released could further affect its credit rating, Fitch noted.
S&P has USI on credit watch with negative implications, where it was placed back in late October of last year, citing questions about the company's future plans. It also issued a credit rating of "double-B-minus."
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