Willis Group Holdings plc WSH inked a deal to take over the majority stake in Towers Watson TW. The transaction is expected to close by this year end, pending approval from shareholders of both companies and customary closing conditions.
With optimism surrounding the merger, shares of Willis Group gained 3.3% in the last trading session to close at $46.90.
Upon completion, the combined entity, which is estimated at $18 billion, will be known as Willis Towers Watson. Willis shareholders will have about 50.1% stake and Towers Watson will hold the remaining 49.9%.
The Purchase Consideration
The merger deal will have Towers Watson shareholders receiving 2.6490 Willis shares for each share of the former. In addition, shareholders of Towers Watson will also get a one-time cash dividend of $4.87 per share.
With approval from its shareholders, Willis Group intends to go for a 2.6490 for 1 reverse stock split. This will result in the conversion of each Willis share into 0.3775 Willis Towers Watson share. On the other hand, each Towers Watson share will be swapped with one share of Willis Towers.
Takeover Rationale
The merger will create an entity with an enhanced portfolio of advisory, broking and solutions with 39,000 employees in over 120 countries serving a wide range of clients in existing and new business lines. The merger will leverage Willis’ presence in the $10 billion plus U.S. P&C corporate market and widen Towers Watson’s exposure to more than 80 countries.
The merger will combine Towers Watson’s Exchange Solutions offering with Willis’ significant middle-market relationships and hence boost growth in the exchange market. Moreover, with expanded capabilities, the combined entity is well positioned to serve its clients better.
Besides ramping up its product profile, the merger will result in $100–$125 million in cost savings to be fully realized within three years of closing. Cost savings will largely be driven by economies of scale, increased efficiencies and removal of duplicate costs.
A strong operational profile will thus result in a solid balance sheet and financial profile, with a diversified revenue mix across segments, geographies and clients, along with scope for considerable cash flow generation. Moreover, the new entity is expected to see an effective tax rate in the mid-20% range.
The new entity’s board will have 12 directors – six each nominated by Willis and Towers Watson, including the current CEOs of both companies. The new company will be domiciled in Ireland.
The Inorganic Story
Willis Group has always capitalized on the opportunities that strategically fit the best, and acquisitions are one of them. This Zacks Rank #3 (Hold) insurance broker’s strategic acquisitions have expanded its geographical footprint in countries like Italy, Canada, the U.K. and France. This month, Willis Group became a corporate member in Miller Insurance Services LLP by acquisition an 85% stake in the latter. This will help it to form a leading London-based wholesale specialist insurance broking firm. The company also announced that it will buy the remaining 70% of Gras Savoye from its Associates line.
Insurers Following Suit
Following the organic route, ramping up of the operational profile seems a well-accepted strategy among insurers as acquisitions rage the insurance space. Recently, Brown & Brown of Colorado, a subsidiary of Brown & Brown, Inc. BRO Inc. inked a deal to buy certain assets of Fitness Insurance. Also, Arthur J. Gallagher & Co. AJG announced the takeover of Monument, LLC – California’s leading self-insured workers’ compensation program administrator.
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