AUB has structured a deal to acquire UK wholesale broker, Tysers, which will give the company direct access to Lloyd’s - the world’s leading insurance market. The acquisition will also enable AUB to scale up its Agencies division and deliver a greater share of wallet of AUB’s brokers – two key components of AUB’s turnaround strategy.
Writing A$3.5 billion of GWP (gross written premium) and having direct access to Lloyd’s, AUB will be able to redirect more than $200 billion of GWP from international wholesale brokers to Tysers. It will also provide increased capacity, facilitate new products and agencies, and attract new customers to AUB’s network.
Needless to say, this will drive revenue growth and margin expansion. Management has identified $10 million of revenue/margin benefit but acknowledges there is significant (unquantified) potential upside to the synergies.
The proposed concurrent deal to sell 50% of the Tysers UK Retail business to PSC Insurance is one of several steps taken to lower the financial risk and burden of the overall deal.
AUB will establish a new A$675 million debt facility, replacing the existing A$250 million facility. Post-acquisition, AUB will have pro forma debt leverage of 2.8x with this metric expected to reduce to 2.4x within 12 months.
The deferred consideration of up to A$176 million after two years appears to be easily achievable given the backdrop of rising premium rates in the UK. The revenue target set is just 10% above pre-COVID levels. There is no change to AUB’s dividend policy. AUB’s FY22f net profit guidance is unchanged at A$72-74 million.
Investment view
The acquisition of Tysers is a big step up for AUB and will boost net profit by around 60% by FY24f including synergies, if everything goes to plan. There are plenty of risks associated with the deal, but AUB has worked hard to mitigate as much risk as possible. This includes the appointment of both Mike Emmett (AUB CEO) and Peter Harmer (non-executive director of AUB) to the Board of Tysers. Mr Emmett is expected to spend a significant amount of time in the UK overseeing the transition.
Risks to investment view
Slower than expected growth in core broking and underwriting divisions or a deterioration across Australian insurance markets would affect earnings. There may be greater than indemnified regulatory risks and/or financial penalties in relation to the Tysers acquisition.
Recommendation
We have retained our Buy recommendation.
