Although three ratings agencies are reticent about debt incurred by Willis North America Inc. in its planned acquisition of Hilb Rogal & Hobbs, announced last week, they believe the transaction in the long run will enhance the broker’s business profile, especially in North America. The $2.1 billion takeover boosts Willis’ revenues by some 30 percent, but the broker remains well behind Aon and Marsh.
Under the terms of the definitive agreement, Willis will acquire all of the outstanding shares of common stock of HRH for $46 a share—50 percent in cash and 50 percent in stock—in a transaction having an equity value of approximately $1.7 billion and an enterprise value (or total purchase price) of about $2.1 billion.
The transaction is expected to close in the fourth quarter of 2008, subject to customary closing conditions, including regulatory and HRH shareholder approval.
HRH is a leading middle-market, U.S.-based insurance broker with a large-account portfolio, according to a joint statement, which noted that HRH generated $800 million of revenues in 2007—$57 million from its international operations, which are based in London.
Willis produced nearly $2.5 billion in total brokerage revenues last year, including retail and reinsurance commissions and fees. On a pro forma basis, the combined entity would have generated some $3.3 billion in brokerage revenue for 2007—a boost of nearly one-third, but still leaving Willis behind Aon ($6 billion) and Marsh ($5.4 billion) in brokerage revenue.
“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.”
However, following the announcement of the $2.1 billion deal, rating agencies were quick to cite their concerns:
• Fitch Ratings placed Willis North America Inc. and Willis Group Holdings Ltd. on “Rating Watch Negative.”
• Standard & Poor’s Ratings Services dropped the counterparty rating of Willis Group Holdings Ltd. to a “triple-B-minus” from “triple-B.” It also listed the outlook on Willis as negative.