Milestone moment

Acquisition activity in Australian broking enters new territory with Ardonagh’s $2.3 billion PSC offer

By Wendy Pugh

When Australia’s third-largest listed insurance broking group confirms it is accepting a takeover offer valuing the business at $2.3 billion, it’s a game-changer.

PSC Insurance Group announced on May 8 that it was recommending shareholders accept a bid from Ardonagh, after in March confirming it had received approaches from unnamed parties and was in discussions that “may or may not” lead to an offer.

London-based Ardonagh, a globally ambitious company that completed a record 67 acquisitions last year, including buying Envest in Australia, describes the PSC deal as a key transaction.

“The acquisition, which has secured the unanimous recommendation of PSC’s board, is a significant milestone in the global growth of Ardonagh and underlines our strong commitment to the markets we serve,” chief executive David Ross said.

Ardonagh chief executive David Ross says PSC’s “journey and values align with our own”

The group plans to merge PSC’s Australia and New Zealand operations with its own, creating a combined business that places $3.3 billion in gross written premium annually. UK operations will also be combined.

The takeover offer, through a scheme of arrangement, will probably be voted on by shareholders in September and will need court and regulatory approvals, but is expected to clear the formalities.

Analysts say the PSC offer pricing is attractive for the sellers and reflects the level of interest in the sector, plus benefits brought by the business itself.

Broking proved resilient during the pandemic, while benefiting from rising premiums in a hard market. Clients tend to remain with their brokers year after year and demand for advice remains strong.

Merger and acquisition activity in the sector has ranged from small-scale buying of equity in SME brokers looking to sell down, to larger business acquisitions.

Clyde & Co partner and insurance lawyer Avryl Lattin says smaller brokerages in particular face rising compliance burdens and difficulties accessing capacity for hard-to-place risks, and some are looking to become part of better-resourced businesses, while the listed broker groups and global companies continue to see growth opportunities through transactions.

“We see acquisition opportunities across all areas of the market,” Ms Lattin tells Insurance News. “There are clearly opportunities for acquiring smaller brokerages as senior brokers retire or grow weary of the regulatory landscape, but we are also seeing consolidation in the market, with some of the mid-size players being acquired.”

Ms Lattin says the PSC transaction solidifies Ardonagh’s position in the local market, particularly after its recent Resilium and Envest purchases, and reflects the current environment.

How Australia’s big three listed brokers compare

“The Ardonagh/PSC deal won’t itself likely trigger further activity, rather that activity is already under way and we expect it will continue for at least the next 12 months,” she says.

Melbourne-based PSC was started by Paul Dwyer in 2006 and listed in 2015. The business, operating mainly in Australia, New Zealand, Britain and Hong Kong, has added underwriting agencies to complement its broking operations and has become an organisation employing 900 people and managing more than $2.59 billion in global GWP.

The distribution division – which includes PSC Insurance Brokers, PSC Network Partners, life broking and workers’ compensation consulting – recorded $1.15 billion in GWP last financial year.

PSC and larger listed broking rivals Steadfast and AUB have been making acquisitions in Australia and New Zealand and have expanded internationally.

PSC’s key deals have included buying Lloyd’s broker Paragon International in 2019, and it contended last year for Melbourne-based Honan, ultimately bought by Marsh. The company’s growth has also led to the launch of its Apex trading platform. The group left the Steadfast network two years ago and subsequently the Steadfast Client Trading Platform.

Speculation about a possible PSC buyer surged after a March Australian Financial Review article saying the company had held informal talks and had hired Goldman Sachs “to steer preliminary takeover talks”. The broker then confirmed in a stock exchange release that it had “recently received multiple strategic approaches”.

In a later release, defending its pre-deal disclosure, PSC said it appointed Goldman Sachs in December to advise on options and in January engaged with parties including Ardonagh, subject to confidentially and standstill arrangements.

Confidential non-binding indicative offers were received on January 29, leading to negotiations with Ardonagh on terms for a deal. PSC says the two sides worked throughout the evening of May 7, but it wasn’t until late in the day on May 8 that all the pieces were in place to make an announcement.

Ardonagh’s 10 largest acquisitions since 2013

Ranked by transaction value at announcement

PSC, in supporting the deal, highlights the complementary fit of the businesses, says both companies are “like-minded, client-focused and ambitious”, and notes the strengths of PSC are identified as strategically important by Ardonagh.

“We believe this transaction maximises value for PSC shareholders while also providing an excellent platform for growth for PSC employees and clients,” Mr Dwyer says.

Morningstar, which estimates PSC accounts for about 3% of the Australian intermediated market by GWP, says the earnings outlook is positive, with further price rises expected globally over the medium term due to claims inflation, more frequent hazard events and reinsurance costs.

“We expect the intermediated market to grow faster than the overall market, a result of more customers seeking independent expertise, and technology should allow a greater number of policies per client, for example, adding personal motor/home on top of a business client’s insurance needs,” it says.

Ardonagh’s $6.19-per-share offer represents a 19% premium to Morningstar’s standalone PSC valuation of $5.20 and is 33% above the three-month volume-weighted average price to March 12, the date at which the takeover speculation was published.

On an underlying earnings guidance basis, the transaction valuation represents a 25.9 to 27.2 price-to-earnings multiple, while the earnings before interest, tax, depreciation and amortisation multiple is 18.7 to 19.4 times.

JP Morgan says in a research note that Steadfast had been trading on a price-to-earnings multiple of about 20 times and AUB Group at about 18 times.

“It is a good price for the sellers and is a significant premium to where the brokers have been trading,” analyst Siddharth Parameswaran tells Insurance News.

“It shows the confidence the capital markets have in brokers and suggests the whole space should be seen reasonably favourably.”

The PSC deal raises questions about whether Steadfast or AUB, companies with capitalisations of about $6 billion and $3.3 billion respectively, could also be targets.

Competition issues may make it difficult for an established international broker with Australian operations to consider dominant domestic players, JP Morgan says. A new international entrant could seek a place in the market through acquisition, but other potential barriers exist with the listed groups, and unlisted companies could be more attractive.

Previous major broking deals in Australia have included the $1 billion sale of Wesfarmers’ businesses to Arthur J Gallagher in 2014.

Marsh reportedly paid $700 million last year for Honan, and Steadfast acquired Coverforce for $411.5 million in 2021. AUB’s most significant transaction has been the $880 million purchase of UK-based Tysers, while Steadfast also looked internationally with its $US55 million acquisition last year of US network ISU Group.

Macquarie Equity Research suggests rising acquisition multiples are making it more difficult for Australia’s listed brokers to find and complete local deals that add value, contributing to a shift into underwriting agencies and offshore markets.

International rivals locally may benefit from having higher multiples themselves, plus currency advantages. And their global market positions and various sources of funds, including from institutional investors, may increase their ability to complete deals.

Ardonagh, whose private equity shareholders are Madison Dearborn Partners and HPS Investment Partners, places more than $US15 billion of premium globally on behalf of clients and operates in 30 countries. The group, formed in 2017 when it brought together a collection of businesses, has become a top 20 global broker. Its first acquisition in Australia was the February 2021 purchase of Resilium and early last year it added Brisbane-based Envest.

It has since backed Envest, which also encompasses the Aviso brand and underwriting agencies, to complete more than 30 acquisitions, building GWP to more than $2.1 billion across Australia. The model involves providing support for businesses joining the group, while leaving them with their own day-to-day control.

“It shows the confidence the capital markets have in brokers and suggests the whole space should be seen reasonably favourably.”
Siddharth Parameswaran

S&P Global says the per-share cash transaction for PSC is the largest deal with a publicly disclosed value in Ardonagh’s history, and the transaction value at announcement is more than triple the amount it paid to acquire Besso Insurance Group and Ed Broking Group from BGC Partners in 2021.

As part of the PSC scheme, significant shareholders and key executives Paul Dwyer, John Dwyer, Brian Austin, Tara Falk and James Kalbassi are rolling about 26% of their aggregate holdings into equity in Ardonagh and will each play an important ongoing role in the combined group.

Ardonagh says Envest chief executive Greg Mullins will oversee the Australia and New Zealand operations. Paul Dwyer will join Ardonagh senior management and work closely with the leadership teams in Australia and Ardonagh Specialty to integrate and grow the combined businesses.

Mr Mullins tells Insurance News it’s too early to comment on team or board changes locally or other specific details, but broadly the aim is to integrate the businesses as seamlessly as possible and “take the best of both worlds” in shaping the future.

“Envest, like Ardonagh, is a diverse group of insurance businesses,” he says.

“In any deal, we would always look to retain and invest in brands that have strong customer loyalty, a targeted market segment and unique service proposition. We believe the PSC and Envest businesses are complementary in that regard.”

Ardonagh and Envest are expected to remain on the lookout for acquisitions as PSC comes under the broader umbrella and builds their reach.

“PSC’s journey and values align with our own and its portfolio of highly complementary businesses provides an abundance of opportunity to strengthen our positions in Australia and wholesale and specialty markets,” Mr Ross says.