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Brown & Brown Enhances Employee Benefits With Hays Buyout

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Brown & Brown, Inc. (BRO - Free Report) has closed the buyout of Hays Companies for $705 million. The deal will help the acquirer ramp up its employee benefits business. The transaction was announced on Oct 22, 2018.

Minneapolis, MS-based Hays Companies is an insurance broker providing on risk management, commercial insurance, employee benefits, consulting services, specialty programs and private client services with primary focus on the upper middle market. The company generates about $200 million in annualized revenues with five-year average organic growth of 6%. Hays Companies will operate as a region with Brown & Brown Retail.

Financial Consideration

The purchase consideration of $705 million consists of $605 million in cash and $100 million in common stock. The equity will have a five-year holding period. The company intended to fund the consideration with cash and debt from $800 million revolver, and thereafter term a portion of the initial purchase price on a multi-tranche debt.

It also stated that there is a potential $25 million earn-out based on the accomplishment of certain revenue and profit targets.

Rational Behind the Acquisition

The acquisition will help Brown & Brown consolidate its Midwest footprint, ramp up organic growth and expand capabilities for providing solutions for customers. Hays Companies estimates generating revenues of $205 million in 2018.

Brown & Brown expects the addition of Hays Companies to enhance its offerings in the upper middle-market accounts base.

The company expects that the buyout will help its employee benefits business generate annualized revenues between $430 million and $440 million while increasing employee benefits business more than 35%. Consolidated revenues are estimated to increase 10% while Retail segment revenues are projected to improve 20%.

Brown & Brown projects onetime integration costs between $8 million and $12 million over the next three to four years. This will help deliver incremental value and improve combined margins. The company aims annual EBITDAC synergies between $10 million and $15 million in the next four to five years.

For 2019, the company projects Hays Companies to generate revenues between $210 million and $220 million and EBIDTAC in the $47-$53 million range. Brown & Brown expects the addition of Hays Companies to drive incremental revenue growth of more than 10% and EBITDAC growth of above 8%.

Inorganic Growth Story

Brown & Brown’s impressive growth is driven by organic and inorganic means across all segments. In over a span of a little more than two decades, the company has acquired more than 470 insurance intermediary operations to boost profitability, expand geographic footprint and enhance products and service capabilities. In the last quarter, it completed 10 buyouts with annualized revenues amounting to about $47 million

Price Performance

Shares of this Zacks Rank #3 (Hold) insurance broker have rallied 14.9% in a year’s time, outperforming its industry’s growth of 9.3%. We expect the company’s sustained operational performance, higher commissions and fees plus a solid capital position to continue driving stock price performance.


Insurer on Integration Spree

Taking the insurance industry’s all-time high available capital resource into account, there has been a noticeable trend of acquisitions in the space of late. Recently, Arthur J. Gallagher & Co. (AJG - Free Report) acquired Meridian One Corporation, which will add a significant value to its Affinity segment.

Stocks to Consider

A couple of better-ranked stocks from the insurance industry are MGIC Investment Corporation (MTG - Free Report) and eHealth, Inc. (EHTH - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MGIC Investment provides private mortgage insurance and ancillary services to lenders and government-sponsored entities in the United States. The company delivered a four-quarter average positive surprise of 34.32%.

eHealth provides private online health insurance exchange services to individuals, families, and small businesses in the United States and China. The company delivered a four-quarter average positive surprise of 29.03%.

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