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$300M pipeline positions Gallagher to perpetuate M&A pursuits

The high multiples private equity-backed brokers are said to be paying for prospective acquisition targets have not deterred Arthur J. Gallagher & Co. from another active year on the M&A front.

S&P Global Market Intelligence has credited the company with 30 acquisition announcements involving companies in a variety of niches and geographies year-to-date through Dec. 14, down slightly from the 32 deal announcements it made during the same time frame in 2015.

"The fact is our M&A activity is strong," CFO Douglas Howell said during a Dec. 13 investor meeting. "We've got $100 million [in terms of revenue] of term sheets signed and ready to close. We've got $100 million that have been prepared and sent out [and] just not returned. And then we've got another $100 million in the draft. So we've got $300 million of deals."

Howell added that the $300 million figure is spread across about 50 prospective transactions.

"Our deal size is small," he said. Gallagher is paying an earnings multiple of "7-to-7.5x ... on average," he added.

Houlihan Lokey Managing Director Arik Rashkes said in a recent interview that midsized and large distributors have been trading at historical highs relative to EBITDA, fueled by private equity interest in insurance distribution. While targets with less than $25 million in annual revenues are generally fetching upward of 7x EBITDA as compared with the 12x-plus for their larger peers in M&A transactions, he said, those multiples too have "shifted up" from where they had been on a historical basis.

Gallagher reported the completion of 28 acquisitions through the first nine months of 2016 for which it issued common stock worth $75.9 million, paid $140.5 million in cash and recorded earnouts payable of $24.7 million.

The company's pipeline, according to an October earnings conference call, included approximately $90 million of revenue associated with agreed-upon term sheets and another $140 million of revenues with term sheets that have been issued or were in the process of being prepared. Since that time, Gallagher has announced four deals, most recently on Dec. 14 disclosing an agreement to acquire an employee benefits broker and human resource consulting firm.

Since S&P Global Market Intelligence has classified certain of Gallagher's recent targets as being outside of what it defines as the insurance brokerage industry, the pace of the company's year-to-date activity as measured by announced acquisitions of U.S.-based targets in that space lags at least three private equity-backed peers: Acrisure LLC , Hub International Ltd. and AssuredPartners Inc., and it is in line with that of another, BroadStreet Partners Inc.

Acrisure, which recently completed a management-led buyout from Genstar Capital Management LLC, had 28 U.S. insurance broker/agency acquisition announcements to its credit in 2016 through Dec. 14, one ahead of the Hellman & Friedman LLC-backed Hub and three ahead of the Apax Partners LP-backed AssuredPartners. Leveraged Commentary & Data, an offering of S&P Global Market Intelligence, recently reported that AssuredPartners priced a term loan package totaling $976 million, proceeds from which the company plans to use in part to fund acquisitions.

Gallagher Chairman, President and CEO J. Patrick Gallagher Jr. said the private equity-backed brokers have been "very successful" with their insurance brokerage strategies. But, he cautioned: "Markets come and markets go. We're in this business strategically for the next 100 years. They're in this business to flip the thing in three to five years, maybe seven. And at some point, we all know that when you play musical chairs, someone doesn't get to sit down."

The CEO, who has held the title since 1995, compared the current situation to the influence of banks in broker/agency M&A in years past where they were the type of acquirer willing to pay "top dollar" for targets. Circumstances have changed dramatically, however, as banks and thrifts accounted for less than 6% of the year-to-date volume of U.S. broker/agency deals, down from 30% as recently as 2006.

Through Dec. 14, S&P Global Market Intelligence had covered 359 announcements of M&A deals involving targets classified as U.S.-based brokers or agencies in 2016. Although that marked a 19.1% decline from 2015's record pace during the same time frame in that year, the tally still ranks as the second highest by a wide margin for the comparable periods in at least the previous 15 years.