Will the new year herald a return to the broker buyout activity of 2007/08?
Remember the heady days of March 2008? In the weeks before a drastic change to capital gains tax, dozens of entrepreneurs rushed to complete the sales of their businesses to various consolidators and insurers, eager to pocket the money and plan for a comfortable retirement. A glance at the news archive brings back memories of AXA buying SBJ, IAG buying Barnett & Barnett, and CCV snapping up Protectagroup, to name but a few of the deals that went through in the space of three weeks.
They were the lucky ones. Those who held out those few extra months, whether through reluctance, indecision or greed for an even bigger prize, quickly discovered that the M&A landscape had changed forever. Thanks to US subprime followed quickly by the meltdown of financial institutions on both sides of the Atlantic, the back end of 2008 and 2009 were the antithesis of 2007/08. Figures published in Insurance Times in October show deal-making at its lowest level since 2002.
But with the first tentative signs of economic recovery, the question now is: will 2010 herald a return to the glory days of dizzying multiples and headline-grabbing deals?
The answer hinges on two factors: who’s buying, and who’s paying.
The buyers are the usual suspects, bar a couple of names from last time round. Towergate can be expected to announce a number of deals in the early part of next year, though none on a transformational scale. Its little sister CCV will also continue to buy, probably making smaller acquisitions at a faster rate. Announcements from Oval are to be expected early in the year, though these are deals that have been in the pipeline for some time. Bluefin chief executive Stuart Reid is on record saying the broker is “open for business” and looking for opportunities. Finally, Giles still has money to spend and remains on the hunt for that transformational deal. Crucially, all these players will be looking to buy at far, far lower multiples than those seen in the halcyon days of 2007/08.
So where’s the money coming from? Towergate’s debt finance continues to come from the major banks, led by Lloyds TSB, following this year’s long-winded renegotiation of its covenants, backed up by substantial investments from its major shareholders (Peter Cullum, Andy Homer et al). Giles meanwhile also has a debt facility with Lloyds, though its acquisition war chest comes mainly from private equity paymasters Charterhouse.
Oval and Bluefin are arguably the more interesting examples. In both cases, their acquisitions will be at least part-funded by insurers. For Bluefin, parent AXA will be stumping up the cash, and for Oval, RSA, as well as other shareholders, has provided a loan.
Lloyds TSB currently appears to be the only major bank willing to put any substantial investment into insurance intermediaries – and it is already heavily committed in the consolidator sector. Meanwhile, private equity is looking to safer investments; 3i for example is thought to be looking to sell out of Jelf. So that leaves insurers.
While their days of buying brokers outright are probably over, as their investment returns come back, expect to see insurers looking at alternative models of putting money into brokers. Perhaps, like RSA, they will call it a loan. Maybe, like AXA and Groupama, they will provide acquisition funding to the brokers they already own. Or perhaps, like Aviva, they will make cash available outright to smaller players.
Either way, the chances are that, as the good times return to the broker M&A market, the UK’s biggest insurers will be lining up to take a share of the action.
- M&A has been at lowest level since 2002
- The major consolidators will buy again in 2010 – but at lower multiples
- Insurers will be looking to invest in acquisitions again, though not as outright purchasers