Drivers of Marsh & McLennan-JLT Deal: Too Much Capital, Not Enough Growth – Opinion

By Chris Hughes, Bloomberg View | September 19, 2018

Too much capital and not enough growth. Faced with this ailment, the insurance sector is reaching for a costly remedy — M&A.

Marsh & McLennan Cos. Inc. Tuesday became the latest [insurance industry participant]* to splash the cash, agreeing to pay 4.3 billion pounds ($5.6 billion) for U.K. broker Jardine Lloyd Thompson Group Plc. The target rightly wasted no time in accepting.

JLT is a relative minnow in this global industry, dwarfed by the likes of Marsh & McLennan, Aon Plc and Willis Towers Watson Plc. Scale and diversification are competitive advantages. JLT risked being further eclipsed, and it’s just too small to lead consolidation.

Marsh & McLennan’s approach came earlier this month just as sterling was bouncing off a year low against the dollar. A currency advantage matters little given the lofty purchase price. The 19.15 pounds-a-share offer is a 34 percent premium to JLT’s closing price on Monday. That may look standard for takeovers, but the stock was a whisker off its all-time high. The price is 25 times JLT’s estimated 2019 earnings, compared with an average trading multiple of 17 for its bigger listed peers.

JLT’s independent directors could not turn this down on any rational assessment of the company’s prospects. Small wonder that Jardine Matheson Holdings Ltd., which holds 40 percent of the shares, is accepting the bid.

Marsh & McLennan has some overlap with JLT in the U.K., presumably contributing to the projected cost savings of $250 million a year. Conservatively valued, these are worth about 1 billion pounds net of implementation costs, roughly the size of the premium. Marsh & McLennan will therefore need flawless execution, plus some additional savings, to make this deal actually create value for its shareholders.

The high price and support of Jardine Matheson make it hard to see a gate-crasher breaking this up. But the drivers of this deal remain for others. French mutual insurer Covea Group’s pursuit of reinsurer SCOR SE remains unresolved, and other large insurers have similar pressures to do M&A. It may not be too long before the next deal.

* Editor’s Note: a slight adjustment to the wording of this sentence was made with the approval of the writer.

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