Consolidators mull merging, floating and refinancing

The consolidator landscape shifted this week as the UK’s biggest brokers sought various ways of shoring themselves up against the ongoing recession and preparing their businesses for 2010.

The main developments included:

• Jelf is looking at its options as its main backer, 3i, reviews its holding in the company. The AIM-listed consolidator was originally seeking insurer funding, but informal discussions have come to nothing. It is now looking at other options.
• Oval has secured a multimillion-pound loan from insurer RSA, to help fund acquisitions. A number of small acquisitions are expected to be announced soon.
• Giles still has an acquisition fund and remains in the market for a transformational deal, possibly by the end of this year. Meanwhile it is preparing the business for a potential flotation as early as 2011.
• A flotation could also be back on the cards for Towergate. But chief executive Andy Homer said: “I don’t think it will be 2010.”
• Bluefin has secured acquisition funding from its owner AXA and is expected to start acquiring again early next year, though at lower multiples than previously seen. Chief executive Stuart Reid said: “We are open for business.”

Speculation centred on Jelf, which reported a £0.4m operating loss for the six months to March 2009. Private equity house 3i is reviewing its 28% stake in the business following its own overhaul and the departure of Bruce Carnegie-Brown, who sat on Jelf’s board. It has been looking for possible buyers for its stake, including a number of major insurers, but talks have come to nothing.

Jelf chief executive Alex Alway confirmed the broker has an ongoing relationship with consultant KPF, which matchmakes whole and partial sales, but said no formal appointment had been made. He said: “We have a good relationship with 3i, but as investors they are always reviewing their options.”

The broker will have to consider a sale, which Giles, for example, might be interested in, although the two are not in formal talks. Another option is that 3i will hold on to its stake until the share price rises.

A senior market source familiar with the business said: “Jelf has a number of issues: its share price is going nowhere, it issued a profit warning earlier in the year. It’s all putting pressure on the business model. “It’s a bit more than just looking for insurer support. Something has to happen, whether it gets sold, or gets refinanced.”

Jelf has also had recently to make a number of deferred payments on acquisitions made at the top of the market in 2007.

Meanwhile, there was continued speculation that Oval would look to sell, but at a price that would rule it out of the market for most buyers. One source said: “Oval’s in play, but for a number that wouldn’t make sense to anyone who can do mathematics.”

RSA, which already has a small stake in Oval and recently made a loan of under £10m, declined to comment. An RSA spokesman confirmed the arrangement, though Oval declined to comment.

The developments came amid a consensus that the consolidators will suffer from the recession well into next year. One senior insurance executive said: “Clients are dropping their exposure and the top five brokers are definitely feeling it. A new government next year would make big public sector cuts, and that would play out in client spending. There’s not much new business out there, and the market’s still soft.”