Aon Corp.'s plan to purchase London-based reinsurance broker Benfield Group Ltd. for some $1.75 billion has drawn mixed reviews from the three major rating agencies, with concerns raised about the deal's impact on Aon's liquidity and integration risks.
Fitch Ratings, Moody's Investor's Service and Standard & Poor's said they believe the company's move would solidify the position of Chicago-based insurance broker Aon as the top reinsurance intermediary. However, they differed over how the acquisition will be executed and its impact on Aon's financial position.
Aon said on Aug. 22 that it would buy Benfield for about $6.55 a share–29 percent above Benfield's Aug. 21 closing stock price. As part of the deal, Aon will assume $170 million of the company's debt, which one rating service termed modest. The all-cash deal is expected to be completed by the end of this year.
o Fitch affirmed Aon's issuer default rating of "triple-B-plus," its related senior debt and "F2″ commercial paper rating. Fitch, setting Aon's outlook as stable, said its rating reflected Aon's strong balance sheet, adding that its financial leverage "will remain within a reasonable range for the rating category in the near term."
o Moody's affirmed Aon's senior unsecured debt rating of "Baa2," but changed the rating outlook to stable from positive, reflecting concerns about integration risk and an expected decline in the firm's cash position.
"The proposed transaction strengthens Aon's global market presence," Moody's Bruce Ballentine, lead analyst for Aon, said in a statement. "We believe the company has sufficient resources to fund the acquisition and related restructuring costs while maintaining a sound credit profile."
o S&P placed Aon's "triple-B-plus" counterparty credit rating on credit watch with negative implications, citing concerns with company cash flows and liquidity as well as integration risks.
In a statement, Neil Stein, an S&P credit analyst, said if the rating service is satisfied with Aon's liquidity, it would affirm the rating, but if the review is not satisfactory it would either "affirm the rating and assign a negative outlook, or lower the rating, but by no more than one notch."
The organizations will be integrated and operate under the name Aon Benfield Re. The deal, they said, is expected to save $122 million in annual costs by 2011, with the elimination of shared administrative and support services.
The deal puts together two companies that fought a court battle over staff recruitment. Last year, Aon paid Benfield $18.4 million to settle accusations that Aon did economic damage to Benfield by illegally poaching employees and business from Benfield's facultative department.
During a conference call with investment analysts, Greg Case, Aon Corp. president and chief executive officer, and Grahame Chilton, Benfield's CEO, emphasized that the firms complement one another, with strong involvement in markets where the other lacks presence. Mr. Chilton characterized the resulting combination as a jigsaw puzzle that had pieces missing from the landscape filled in.
"The team will be delighted by this transaction," according to Mr. Chilton, who said the deal recognizes the intrinsic strength of Benfield and provides shareholder value. He said it will also give employees greater opportunities for growth.
Mr. Case noted that where Aon is strong in the casualty reinsurance end of the market, Benfield's strength is in property. Benfield is also strong in Asia, he said.
"Aon and Benfield's franchises are highly complementary…and this transaction provides a very unique opportunity to build on Benfield's strengths…to develop our business around the globe," said Mr. Case.
Mr. Chilton said the deal's primary driver was to increase shareholder value and improve customer service. He said it was not driven by the view that the reinsurance market is in decline, or that it was difficult to remain independent.
He also noted that in partnering with Aon, Benfield will have greater access to the capital markets, noting the firm has limited itself to the stock markets in the past.
Under the terms of the deal:
o Mr. Chilton will become vice chairman of Aon Group, reporting to Mr. Case. He will also join the executive committees of Aon Corp. and Aon Benfield Re.
o Michael O'Halleran, executive chairman of Aon Re Global, will be named executive chairman of Aon Benfield Re.
o Andrew Appel will be named CEO of Aon Benfield Re and remain as chairman of Aon Consulting Worldwide.
The Benfield Web site says the firm was founded in 1973 as Benfield, Lovick and Rees & Company Ltd. The Benfield Group was created in 1988 after a management buyout that included Mr. Chilton. It became a public company in 2003 when it was listed on the London Stock Exchange.
Benfield has fought off acquisition rumors in the past–most notably in 2002, when it publicly denied it was in talks to merge with insurance broker Marsh.
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