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Arthur J. Gallagher (AJG) to Buy Willis Re for $3.25B in Cash

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Arthur J. Gallagher & Co. (AJG - Free Report) inked an agreement to buy Willis Towers Watson plc’s (WLTW - Free Report) Willis Re for $3.25 billion in cash. Willis Re consists of treaty reinsurance brokerage operations of Willis Towers Watson. Pending closing conditions, the transaction is expected to see light by the first quarter of next year.

Willis Re's treaty reinsurance brokerage operates in 24 countries, places over $10 billion of premium annually and represents over 750 insurance and reinsurance company clients. This business generated $745 million estimated pro forma revenues and $265 million estimated pro forma EBITDAC in 2020. Thus. the addition of Willis Re positions Gallagher Re as one of the top three reinsurance brokers as well as provides a comprehensive suite of analytics capabilities including catastrophe modeling, dynamic financial analysis, rating agency analysis and capital modeling.

The acquirer estimates the acquired operations to have been about 5% accretive to its 2020 adjusted GAAP EPS excluding earnings from clean energy investments and 9% accretive to 2020 adjusted GAAP EPS excluding amortization and earnings from clean energy investments.

In May 2021, Arthur J. Gallagher agreed to buy Willis Re as part of closing the pending Willis Towers Watson buyout by Aon plc (AON - Free Report) . However, in July 2021, the much-awaited merger fell apart as the Department of Justice feared that the merger could threaten competition and thus filed an antitrust lawsuit. Had the merger materialized, it would have marked the insurance sector's largest deal and it would have dethroned Marsh & McLennan Companies Inc (MMC - Free Report) , the largest insurance broker.

With the termination of the merger, the agreement with Arthur J. Gallagher divest Wills Re were also cancelled. Nonetheless, on its second-quarter earnings conference call, Willis Towers again announced that it is conducting a review of strategic alternatives for Willis Re.

Coming back to the current agreement, Arthur J. Gallagher could pay up to an additional $750 million in cash subject to certain third-year revenue targets.

The acquirer intends to finance the transaction using cash on hand, including the $1.4 billion of net cash raised via its May 17, 2021 follow-on common stock offering and the $850 million of net cash borrowed via its May 20, 2021 30-year senior note issuance, short-term borrowings and additional free cash generated before close.

The company estimates integration costs of about $250 million and about three years to integrate the acquired entity.

Arthur J. Gallagher boasts an impressive inorganic story. Since January 2002, the company has acquired 597 companies. Its merger and acquisition pipeline is quite strong with about $300 million revenues associated with nearly 40 term sheets either agreed upon or being prepared.

A solid capital position supports Arthur J. Gallagher in its growth initiatives. The company estimates more than $2.5 billion for merger and acquisitions consisting of $1 billion in cash, about $650 million of net cash generation in the second half of 2021 and $600 million to $700 million of borrowing capacity.

This Zacks Rank #3 (Hold) insurance broker remains focused on long-term growth strategies for delivering organic revenue improvement, and pursuing strategic mergers and acquisitions. It is also focused on productivity improvements and quality enhancements that should help it post sturdy numbers in the future.  

Shares of Arthur J. Gallagher have gained 13.4% year to date compared with the industry’s 6.4% increase. Efforts to ramp up its growth profile and capital position should continue to drive share price higher.

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