Marsh & McLennan Companies [MMC:NYSE] – Market Cap 42,252bn

Jardine Lloyd Thompson plc [JLT.T:LSE] – Market Cap 4,025bn

Introduction 

On September 18, 2018, the New-York-based conglomerate Marsh & McLennan Companies Inc. (“MMC”), a global leader in the fields of risk, strategy and people, acquired the lower-scaled UK rival Jardine Lloyd Thompson plc (“JLT”), a specialized provider of insurance, reinsurance and employee benefits advisory, brokerage and related services, for a price of £4.3bn. The deal strengthens the recently observed consolidation trend shaping the insurance industry, taking place in response to a price pressure which is progressively squeezing insurers’ revenues. MMC’s move is in line with the Group’s corporate strategy, aimed at consolidating Marsh’s leading position in the multi-faceted insurance business.

About MMC

Born as a small insurance agency in Chicago 147 years ago, MMC today boasts a strong network of four partnering companies providing professional services, whose operations can be split along two main business lines: Risk & Insurance Services, and Consulting. MMC’s members – namely Marsh, Guy Carpenter, Mercer and Oliver Wyman – have been consistently ranking throughout last years among the worldwide leaders in each of the sectors in which they are respectively active.

With nearly 65,000 employees distributed all over the world, MMC generated in FY17 consolidated revenues exceeding $14bn (+6.15% YoY), with a strong operating income settling in the region of $3.5bn (+9.7% YoY) and overall profitability slightly decreasing. Specifically, FY17 fall in Net Income – amounting to $1.5bn (-15.6% YoY) – was mainly due to a $460mn one-off provisional charge related to US Tax Reform’s enactment.

Marsh is part of MMC and it is the main and most historical company of the Group. Global leader in the field of insurance broking and innovative risk management solutions, the company advises clients located all around the world, operating in every industry and independently of their size, ranging from firms and governments to multinational organizations and individuals. Leveraging on the skills of over 32,000 employees distributed around 500 global offices, Marsh offers a portfolio of services spanning risk management & consulting, insurance broking, alternative risk financing and insurance program management services.

About JLT

In 1972 Jardine Matheson founded Jardine Insurance Brokers, which was listed on the London Stock Exchange in 1991. Later on, in 1997, the merger with Lloyd Thompson Group would create a new company named Jardine Lloyd Thompson Group, known as JLT group. The operations of the firm are divided into two segments: the risk & insurance business and the employee benefits business. The first one is responsible for 77% of the revenues of the group, while the second one accounts for the remaining 23%. Risk & insurance refers to reinsurance broking, and the supply of specialty insurance -construction, aerospace, energy, and others-, which is a core element of the company’s strategy. JLT is the UK’s leader in the employee benefits segment, which is comprised of private pension funds and wealth management solutions. In the FY17 revenues had increased roughly 10% in comparison to the previous year, while the net income had soared close to 42%.

Industry Overview

The insurance sector has faced significant challenges in the past years. With the spread of the internet, companies have undergone a digital transition that due to additional investment has driven an increase in expenses but has still to deliver the expected economies in terms of automation. Another consequence of the technological innovations is a negative pressure on revenues, since consumers can now research and compare prices online increasing price competition. On top of that, years of historically low interest rates contributed to a slower growth in revenues, since companies’ investments in the sector are usually interest-sensitive assets. Indeed, the revenue growth observed from 2009 and 2016 was of only 10%.

This pressure building up in the industry resulted in a fast consolidation wave. Firms looked to expand both horizontally and vertically. The United States government also played a big role in this trend. The tax reform approved by the Trump administration has lowered corporate taxes, which made doing business in the US market more convenient. Furthermore, new tax regulations have closed the so-called Bermuda loophole, putting pressure on Bermuda-based insurance companies (as reported in the case of the acquisition of XL Group by AXA).

The growth in the industry has experienced a geographical shift and is now concentrated in Asia and Latin America, as the consumer middle class grows in these regions. The property and casualties (P&C) business in Emerging Markets, for instance, has seen a 9.6% increase in premiums in 2016. The estimates for 2020 also indicate that the fastest growing markets for P&C will be Latin America and the Middle East. For life insurance, however, APAC is expected to contribute to 70% of the global growth until 2020.

Deal Structure

When, Marsh & McLennan announced that it is to acquire the rival Jardine Lloyd Thompson Group Plc. it committed to pay £19.15 per share, which puts the diluted equity value of the target company at $5.6bn and its enterprise value at $6.4 bn. The price paid implies a 33.7% premium to the closing price of £14.32 on September 17^th. The deal will take form of an UK court-sanctioned scheme of agreement, and, in order to comply with UK requirements, financing will be provided by Goldman Sachs for the operation.

The deal is supported by JLT’s main shareholder Jardine Matheson Holdings, which accounts for 40.5% of the companies’ outstanding shares. However, it still lacks approval of regulatory agencies and of JLT’s shareholders. The deal is expected to be completed in the spring of 2019.

Deal rationale

JLT’s acquisition by MMC represents a further step towards the New-York-based company’s metamorphosis into a global reference point and a worldwide active player in the fields of risk, strategy and people. The specific rationale behind MMC’s decision to take JLT on board combines a wide range of factors.

As witnessed by the fact that negotiations occurred directly between the CEOs of the companies, therefore lasting less than two weeks, a major role in the deal was played by the trusted relationship in force between the two companies. This gives to the acquisition the typical traits of an acquihire in which an important stake of the economic effort – hereby referred to as the acquisition premium paid by MMC – was justified by target’s teams’ above average expertise and subsequent capability of outperforming competitors.

From a financial standpoint, the acquirer expects to monetize the benefits of a workforce rationalization. To date, MMC accounts for 65,000 employees, to be compared against JLT’s 10,000. The US conglomerate declared it plans to cut between 2% and 5% of the combined group’s workforce, as to say between 1,500 and 3,750 jobs in absolute terms. Redundancies would mainly come from finance, HR and IT services units, as well as from legal and administrative support. These cost savings are estimated to be around $250mn per year and to be fully realized over the next three years. If given the right accounting and tax treatment, they would allow the broker to entirely repay the control premium. The expected one-off integration costs associated with the above described synergies are assumed around $375m.

On top of these savings opportunities, the two companies share some important operational complementarities. Specifically, acquiring JLT’s core activities would create considerable benefits to MMC both in terms of sectors served and activities portfolio. In fact, the acquirer will strengthen its presence in the energy, mining, healthcare, construction, marine and aerospace fields, as well as in financial lines, political and trade risk. Moreover, absorbing JLT’s Employee Benefits unit would further expand MMC’s activities by adding advisory and brokerage services in relation to pension consultancy, administration and wellness, life insurance and wealth management. The deal would also offer MMC the opportunity to exploit a considerable geographical diversification, allowing the insurance giant to consolidate its position in Asia and Latin America.

Finally, MMC’s offer represented the opportunity of a very well-priced exit strategy for JLT’s major shareholder, the Hong-Kong based conglomerate Jardine Matheson, owner of a 40% stake in the company.

Market reactions

In light of the generous premium paid by MMC, JLT’s shares were up 30.8% after the announcement was made public, reporting a closing price for Tuesday 18th of $1,872.87.

On the other hand, MMC’s shares were down 4.0% to a more conservative price of $83.16 at the end of Tuesday’s negotiations. The slight decrease in the acquirer’s share may be due to market’s uncertainty around the size of the premium paid by MMC.

Advisors

MMC appointed Goldman Sachs as financial advisor, while JLT called for JP Morgan’s advice. Slaughter and May and Wachtell, Lipton, Rosen & Katz acted as MMC’s legal, while Clifford Chance Rogers & Wells served as JLT’s external legal counsel.