Willis Sees Deal to Buy HRH Raising U.S. Revenue

By | June 9, 2008

Willis Group Holdings, the third largest global insurance broker, said Monday it sees its $2.1 billion deal for a rival broker boosting growth, especially in the United States.

Willis said late Sunday it would buy Richmond, Virginia-based Hilb Rogal & Hobbs Co in a cash-and-stock deal valued at $46 a share. The deal has an “equity value of approximately $1.7 billion and an enterprise value of approximately $2.1 billion,” said Willis. Willis will also assume $400 million of HRH debt under the agreement.

CEO Joseph Plumeri said he does not expect to pursue any deals of similar size soon. “We have enough on our plate that we think is exciting and attractive,” he said.

Willis, which is domiciled in Bermuda and has headquarters in New York and London, sees about 30 percent of its total revenue from the United States, but expects that to grow to about 45 percent once it closes its deal with HRH, said Plumeri.

HRH, the eight largest U.S. insurance broker, has 140 offices throughout the United States and two in the United Kingdom.

Plumeri said there is minimal overlap between the two companies, with only 24 of HRH’s offices located near Willis operations.

He said while he sees strong cost savings as a result of the deal, these are likely to be driven by such items as technology savings and HRH no longer having to cover expenses associated with being a public company. He said no job cuts nor office closures had been decided.

Willis sees annualized cost savings of about $140 million by 2012, and will rename its North American operations Willis HRH.

Plumeri said 2008 earnings are still expected to be in a range of $2.85 to $2.95 a share, on an adjusted basis. And in 2009 the brokerage sees earnings per share of $3.15 to $3.25 a share, lowered from an earlier $3.30 to $3.40 per share forecast.

Analysts, on average, expect Willis to earn $2.91 a share in 2008, and $3.30 a share in 2009, according to Reuters Estimates.

The company raised its 2010 outlook for adjusted earnings per share by 5 cents to a range of $4.05 to $4.15 a share.

The deal, the largest transaction for this industry since Willis’ biggest rival Marsh & McLennan’s 1998 acquisition of Sedgwick Group, is expected to close in the fourth quarter.

A softening market for most insurance lines has eaten away at revenue, which is largely derived from commission and fees, leaving companies to pursue growth through deals such as this one.

Under a recent regulatory agreement, Willis will for a three-year period be able to continue to accept so-called “contingent” commissions paid to HRH.

Contingent commissions are paid by insurers to a broker in exchange for receiving business, and were abandoned by the largest industry players, including Willis, after a 2005 regulatory probe. Many smaller players have continued to count on contingents as a key source of revenue.

Plumeri said he sees no difficulty in replacing revenue generated by contingent commissions from other sources of income after Willis is no longer able to accept these incentive payments, which are roughly $50 million in HRH’s case.

Willis shares were 2.3 percent lower at $35.06 in trading on the New York Stock Exchange, while HRH shares were up 43 percent at $44.20. (Reporting by Lilla Zuill; Editing by Brian Moss and Steve Orlofsky)

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