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On Monday, Goldman Sachs Capital Partners VI, a private equity fund of The Goldman Sachs Group Inc. (GS - Analyst Report), agreed to divest USI Insurance Services LLC to Canadian private equity firm - Onex Corporation for $2.3 billion. Subject to certain customary conditions and regulatory approvals, the deal is anticipated to be completed by the end of 2012.

New York-based USI is an insurance broker acquired by GS Capital Partners in 2007 for $1.4 billion. The amount also included the settlement of USI’s debt obligations. Therefore, selling off the firm is a profitable deal for Goldman.

Background

Operating through offices in Toronto, New York and London, Onex is a private equity firm specialized in acquisitions and platform acquisitions. The company has about $14 billion of assets under management.

On the other side, USI provides property, casualty, employee benefit and retirement consulting services. Working with 3,300 employees from 100 U.S. offices, this ninth largest insurance broker in US has been actively acquiring smaller insurance agencies and brokers in recent years.

After being taken over by Goldman, USI has been successful in integrating operations and has established itself among industry leaders. It came up with differentiated acquisition abilities and scope for strong organic growth. With a prudent management team, USI has performed well over the last several years and has grown organically.

Terms of the Deal

Since the employees of USI also invested in 2007 deal, they would be co-partners with Onex in the USI deal. Alongside, in the USI deal, Onex Partners III private equity fund is making an equity investment of $700 million, in which Onex owns about 25%. Therefore, upon the completion of the transaction, Onex, Onex Partners III and employees of USI will be the owners of USI.

For Onex, Morgan Stanley (MS - Analyst Report) acted as a financial advisor, while GS Capital Partners sought financial advice from RBC Capital Markets LLC.

After-Effects of the Deal

According to Mike Sicard - CEO of USI, the insurance broker has strengthened its foothold in the market by serving clients with customized solutions. Therefore, it looks forward to the upcoming partnership with Onex.

Moreover, the USI deal will aid Onex in strengthening its foothold in the market and enhance its financial services.

Similar Actions

Last week, another firm - The Blackstone Group LP (BX - Analyst Report) announced an agreement to divest its entire stake in the specialty insurance brokerage firm – Alliant Insurance Services, Inc. – to private equity firm, Kohlberg Kravis Roberts & Co. (KKR - Snapshot Report). In 2007, Blackstone acquired Alliant Insurance from New York-based Lindsay Goldberg & Co. LLC for an estimated $1.1 billion.

Most notable deals of this sort includes The Carlyle Group LP (CG - Snapshot Report) acquisition worth $3.3 billion announced earlier this year, of a controlling stake in Getty Images Inc., which was earlier acquired by Hellman & Friedman LLC for $2.4 billion.

Conclusion

Over the past few quarters, strong revenue growth has been recorded by insurance brokers. This growth has been driven by insurers who have inflated prices on the products offered in order to offset huge catastrophe losses in 2011.

Therefore, good cash flow is anticipated in the insurance industry which has attracted private equity firms. These firms, in expectation of sturdy cash flow and small capital needs, are inclined to acquire insurance brokers.

Generally, private equity firms invest in the private equity of operating companies and aim toward maximizing the value of that investment. They make longer-hold investments in explicit investment areas in which they have expertise and exit at good profits. Therefore, Goldman’s divestment of USI reflects this very strategy and we expect it to pursue other profitable investment proposals to use the proceeds from this deal.

Goldman currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We believe such profitable divestments will be an appropriate step for the company and will help boost shareholders’ confidence, which might lead to positive estimate revisions. This, in turn, could cause an improvement in the Zacks Rank.

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