In October, insurance and risk specialist, Marsh & McLennan, priced US$7.25 billion of senior notes, in part to support its acquisition of McGriff, an insurance broking and risk management service provider in the United States. McGriff reported earning US$1.3 billion of revenue for the trailing twelve months ended 30 June 2024. The transaction will add to Marsh McLennan Agency’s capabilities across commercial property and casualty, employee benefits, management liability and personal lines.
Under the terms of the transaction, Marsh McLennan will pay $7.75 billion in cash consideration, funded by a combination of cash and proceeds from debt financing. In conjunction with the transaction, Marsh McLennan will assume a deferred tax asset valued at approximately $500 million. The transaction is targeted to close by year-end, subject to regulatory clearance and other standard closing conditions.
The bond issuance consisted of US$950 million of 4.550% senior notes due 2027, with US$1 billion of 4.650% due 2030, another US$1 billion of 4.850% due 2031, with a further US$2 billion of 5% due 2035, US$500 million of 5.350% senior notes due 2044, US$1.5 billion of 5.400% senior notes due 2055 and US$300 million aggregate principal amount of its floating rate senior notes due 2027.
Speaking on the firm’s Q3 earnings call with analysts, Mark McGivney, chief financial officer at Marsh McLennan said, “McGriff is a terrific company with excellent leadership, a culture similar to MMA’s, a diversified business mix, presence in faster growing US markets and a strong track record of performance. We will be paying US$7.75 billion in cash consideration, funded by a combination of cash on hand and new debt and we expect to close by year end subject to regulatory approval. As part of the transaction, we expect to assume a deferred tax asset valued at approximately US$500 million. As we’ve noted in the past, we maintain considerable balance sheet flexibility to position us for this type of opportunity. We’ve secured a committed bridge loan facility for the full amount of the purchase price and currently plan to replace these commitments with permanent financing in the Q4 as we get closer to closing.”
Outlining the financing programme further, he said, “Based on our outlook today, we expect to raise US$7.25 billion in new debt to fund the transaction. We value our high quality ratings and we were pleased that all three rating agencies recently affirmed our current ratings with no changes in outlook. The financial and capital management plan contemplated in the transaction is not only consistent with maintaining our current ratings, but we also expect to have meaningful flexibility for capital deployment next year. Although initially our leverage ratios will increase, the substantial cash flow we expect to generate as well as increased debt capacity through earnings growth will enable us to bring our leverage ratios back in line with levels necessary to maintain a strong ratings profile.”
On the call, Rob Cox of Goldman Sachs asked, “We Appreciate that it’s the largest M&A year in MMC’s history. I’m curious if the price you’re paying for top 100 brokers has changed your thought process at all on relative capital deployment across the different avenues.”
John Doyle, Marsh McLennan’s CEO said, “Look, we’ve talked about our approach to capital management. We favour investing in the business over buybacks. We — as you know, aspire to be – to raise our dividend each and every year as well. We have a responsibility, obviously, to be good stewards of our capital. So we are — although multiples have increased over the course of the last several years, we have great confidence in our ability to earn a return well in excess of our cost of capital. And so should that change or should we see a deal that doesn’t accomplish those objectives. We’ll deploy capital elsewhere. But we have a very strong reputation as a buyer in the marketplace. We spend a lot of time game planning various scenarios from small to mid-sized kind of tuck-in store business to more material deals like McGriff and we’re very well positioned in that marketplace. Mark talked about even after McGriff, we maintain a lot of flexibility if we see the opportunity to make ourselves not just bigger but better as a business going forward.”
McGivney continued, “While we intend to pause share repurchases in the fourth quarter, as we think about capital management into next year, we expect we will maintain our balanced approach that includes increasing our dividend and reducing our share count each year as well as continuing to fund high quality acquisitions. We will obviously have more guidance around our outlook for capital deployment in 2025 on our Q4 earnings call early next year.”
Responding to the Q3 earnings announcement, Morgan Stanley analysts, Bob Jian Huang, Daniel Lee, ACAS noted that results were largely in-line with expectations and that steady growth “in a potentially more uncertain environment” will be important.
As a result, they suggested the investor should assess the firm based on three key factors in future.
“While organic growth will be critical, given the pricing environment remains somewhat tepid in commercial casualty lines and the global GDP does not appear to be as resilient as the US,” they wrote. “That said, potential pricing growth given the need for more rates from US reinsurance casualty and property catastrophe could be supportive. Marsh is on track for the largest M&A year in the company’s history. This is capped off by the McGriff acquisition at the end of 3Q24. We expect this acquisition to be slightly accretive to earnings at early stages of the integration. Overall, the continued acquisition and growth from acquisition will be important to earnings. Given the elevated Comps & Benefit for four out of the last five quarters, some focus will likely be around how this line develops going forward.”
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