The NFP deal will dramatically expand Aon’s middle market business

Aon PLC’s proposed acquisition of NFP Corp. for $13.4 billion, will greatly expand the middle-market business, particularly in employee benefits, and allow it to grow faster, observers say.

The deal will also position it to buy other smaller brokers as it builds on NFP’s existing M&A capabilities, they said.

The deal also would see Aon re-enter the growing wholesale brokerage sector, which it and other major brokers exited nearly 20 years ago after conflict-of-interest concerns raised by the former New York attorney general’s investigation — and more late Governor – Eliot Spitzer in the insurance industry.

The deal is expected to close next year, but Aon said it is conservatively estimating financials based on a June 2025 closing.

The purchase of private equity-owned NFP, the 13th largest brokerage in the U.S. business, according to Business insuranceAon’s latest ranking will not change Aon’s ranking as the world’s second-largest brokerage after Marsh & McLennan Cos. Inc., but will add over $2 billion in mid-market revenue. Marsh McLennan himself has built a significant book of small and medium-sized businesses through his agency Marsh McLennan, established in 2008.

The NFP deal announcement, which came on Wednesday after months of market speculation about Aon’s intention to make a significant middle-market purchase, came about a year and a half after Aon’s proposed $30 billion acquisition of rival Willis Towers Watson PLC collapsed amid antitrust concerns.

The NFP deal is unlikely to face similar scrutiny from competition regulators, observers say.

“Given that the target and existing client base is quite different from Aon’s … we believe it will be viewed much differently than the Willis transaction experience,” said John Weppler, chairman and CEO of MarshBerry, a Woodmere, Ohio-based brokerage advisory firm and M&A specialist.

NFP originated as a financial advisory firm focused on life insurance and wealth management. It launched an initial public offering in 2003, but was brought back into private ownership in a deal with its current owner, Madison Dearborn Partners LLC, in 2013.

Since then, it has grown and diversified through a combination of organic growth and acquisitions.

Aon said it will run NFP as a separate platform, which will continue to be led by CEO Doug Hammond.

The purchase price of $13.4 billion will consist of $7 billion in cash and $6.4 billion in Aon stock. Aon said the price would represent 15 times earnings before interest, taxes, depreciation and amortization — a common measure of the value of brokerages — when the deal closes. Observers say the valuation is in line with current M&A market conditions.

Aon said it expects NFP’s revenue to grow to $2.9 billion in 2025 and EBITDA to grow to $800 million.

NFP reported $2.21 billion in gross revenue and $1.93 billion in brokerage revenue in 2022, according to Business insurance2023 Agents and Brokers Ranking and Directory

The brokerage, which has about 7,700 employees, reported a revenue breakdown of 44.2% employee benefits, 24.3% property/casualty retail, 14.3% personal lines, 4.7% wholesale and 12 .6% others. About 89% of its customers are based in the US and it has 313 sales offices.

It is the 7th largest benefits brokerage with $977.3 million in employee benefit revenue, and among retail brokers, NFP has the 9th largest wholesale book with $103.6 million in trading revenue. wholesale.

Given the size and more fragmented nature of the middle market sector, the purchase will give Aon more opportunities to grow the business, said Meyer Shields, Baltimore-based managing director of Keefe, Bruyette & Woods Inc.

Aon has underperformed organic growth compared to many of its peers in recent years, Mr. Shields said. “I think they wanted to change the whole story of Aon,” he said.

And given Aon CEO Greg Case’s successful track record of integrating acquisitions, the deal is likely to end up expanding profit margins, he said.

“This acquisition unlocks a fast-growing mid-market segment with significant opportunities for us to enhance NFP’s strong existing distribution of content and capabilities,” said Krista Davis, Aon’s chief financial officer, on a conference call with analysts on Wednesday.

Aon expects one-time integration costs of $160 million, Ms. Davis said. Because NFP will operate as an independent platform, the cost savings will largely be related to back-office functions and third-party costs such as supply and real estate costs, she said.

The breakup fee if the deal is not completed is $250 million, Mr. Case said.

Keeping NFP as a separate entity will allow it to continue operating as a mid-market specialist, said Timothy J. Cunningham, managing partner at Optis Partners LLC, an investment banking and financial advisory firm in Chicago.

“Mid-market business is very relationship-oriented. A lot of that is based on a relationship between a producer and a business owner, whereas on the risk management side it’s very institutional,” he said.

But Aon’s ownership will allow NFP brokers to tap into the larger firm’s resources when needed, such as for more complex venture placements, Mr Cunningham said.

The addition of NFP’s acquisition team will create opportunities for Aon to buy more middle-market brokers, MarshBerry’s Mr. Wepler said.

“NFP has a well-seasoned, very capable and experienced M&A team that is very experienced in doing, compared to Aon, a larger number of smaller transactions,” he said.

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