Divestitures more likely than Aon abandoning Willis deal: Analysts

After the US Department of Justice (DOJ) decided to sue in an attempt to block Aon’s acquisition of broking rival Willis Towers Watson (WTW), analysts at KBW said that rather than abandoning the merger, Aon is more likely to offer additional divestitures.

The DOJ’s law suit and complaint alleges that the merging of Aon with Willis Towers Watson (WTW) would create a “broking behemoth” and stifle competition across many segments of their businesses, including large corporate P&C insurance broking, reinsurance broking, benefits and more.

It’s the largest threat posed so far to the parties transaction completing in the coming weeks and the DOJ is acutely focused on how the deal could “eliminate competition” between two of thee big three brokers in insurance and reinsurance.

Despite the fact divestitures have been made, as part of remedy packages for the European Commission (EC), which included reinsurance unit Willis Re, sales focused on the German pension sector, as well as Aon’s specific offering to sell $1.4 billion of US retirement related units to appease the DOJ, the Justice Department believes divestitures offered so far are “inadequate”.

“Proposed remedies are inadequate to protect consumers in the United States. The complaint also alleges the U.S.-focused divestitures in health benefits and commercial risk broking, in particular, are wholly insufficient to resolve the department’s significant concerns,” the US DOJ explained.

Of course, Aon and WTW disagree, feeling the DOJ does not understand their businesses or the marketplaces they operate in.

Which could lead to a bit of a stalemate, but analysts at KBW say that this could all lead to litigation, more divestitures, or the merger agreement collapsing.

It’s impossible to predict the success of any litigation and this would be seen as likely to be messy, protracted and challenging to win for the merger parties.

KBW’s analyst team said, “Litigation seems very likely to prolong the deal’s uncertainty, which would probably lead both employees and clients to seek stability elsewhere.”

As a result, the analysts see additional divestitures as the most likely route forwards, as abandoning the deal is perhaps likely seen as a last resort, not least as Aon would have to pay the $1 billion break-up fee to WTW.

The main route would appear to be the sale of additional large corporate risk broking assets, as well as some employee benefit divestitures it appears, for which KBW sees the likelihood of plenty of buyers stepping forward to acquire any divestitures on offer.

On abandoning the deal altogether, KBW’s analyst team said, “We see very little likelihood of the deal breaking absolutely, which would entail AON paying a $1 billion termination fee to WLTW with nothing to show for the last 18 months of effort.”

However, should a break occur, the analysts note their concern on WTW, which they highlight has lost a significant number of employees and has no clear leadership successor in place, meaning they see possible additional downside to WTW.

But on Aon, they note that even buying a downsized WTW, with lower revenue forecasts attached, means significant growth for the company and the analysts believe Aon has the ability to maximise the value from that acquisition, even after more divestments, meaning they don’t see much additional downside for Aon.

One other point of note, the analysts see a break-up of the Aon WTW merger as negative for Gallagher as well, but really just based on how positive the acquisitions it is set to make such as Willis Re are for the company.

But even so, the analysts said on AJG, “We think that its current operations would continue basically uninterrupted, and don’t see significant downside in the shares.”

Also read:

– US DOJ sues, says Aon Willis would be “broking behemoth”, parties disagree.

– Aon selling $1.4bn of US retirement units to address US DOJ merger questions.

– US DOJ may not challenge Aon / Willis Towers Watson merger: Report.

– Aon / WTW: Willis Re sale supported, as industry wants broker choice.

– Aon sells German pensions business to LCP, as further step towards WTW merger.

– Aon & WTW agree $3.57bn sale of assets to Gallagher, including Willis Re.

– Gallagher likely buyer of $3bn Aon – Willis (WTW) divestments: Report.

– Aon expected to get conditional WTW acquisition approval from EC: Reuters.

– EC asks for feedback on sale of Aon / WTW assets, as MMC gains talent.

– Aon in proactive offer to US DOJ on Willis Towers Watson merger: Report.

– Aon – Willis Towers Watson divestiture reports expand to US & Bermuda.

– EC extends Aon – Willis Towers Watson merger deadline again.

– Aon – Willis Towers Watson merger deadline pushed back by EC.

– Aon – Willis Towers Watson merger assessed by Singapore competition authority.

– Aon & Willis Towers Watson merger may face EC statement of objection: Reuters.

– Aon & Willis Towers Watson merger to “significantly lessen competition”.

– Aon & WTW cite alt. capital, disintermediation & marketplaces in defence of merger.

– Aon & Willis Towers Watson reveal leadership of combined company.

– Willis Re divestment seen necessary for Aon – WTW merger to complete.

– If Aon / WTW leads to divestitures, AJG seen as “best fit” for Willis Re: KBW.

– EC investigates Aon / WTW deal, cites competition “concerns”.

– Aon + WTW to “extend proven model of catastrophe bonds” – CEO’s Case & Haley.

– Aon & Willis Towers Watson to merge.