Revealed: How Marsh and Gallagher are plotting UK acquisitions

Much of the recent talk about UK SME broker mergers and acquisitions has been dominated by the new consolidators such as GRP and PIB.

But it should not be forgotten that there are much bigger beasts in the market that also have a strong appetite for deals.

Marsh is keen to replicate the success of its Marsh & McLennan Agency (MMA) mid-market broker acquisition model outside the US, and in the UK this will mean building on its acquisition of Jelf with further deals.

After its buying spree of large UK consolidators, Arthur J Gallagher now sees the opportunity for smaller deals.

And market observers are eagerly awaiting Aon’s next move.

If the US is anything to go by, Marsh and Gallagher will be making further moves in the UK.

Gallagher has grabbed the headlines because of its voracious appetite for US brokers – it bought 42 in 2015, and acquired eight more by the end of the first quarter of 2016.

But Marsh unit MMA has also been bulking up, buying smaller brokers in the US to gain a national presence. It has spent more than $2bn (£1.4bn) on 51 deals since it started buying in 2009, and now has annual revenues of close to $1bn.

Replicating the model

Marsh now wants the same in the UK. Marsh parent Marsh & McLennan Companies said in its 2015 annual report: “We believe we can replicate this success in overseas markets, including the United Kingdom.”

Marsh’s answer to the MMA model in the UK is Jelf. The company is not slavishly reproducing the MMA model. Rather than building up a national network bit by bit, the Jelf deal gave Marsh a network of offices in 34 locations in the UK. 

It will look to build on this – although selectively, as MMA has in the US.

A Marsh spokesman said: “Our acquisition of Jelf underlined our commitment to serving the needs of the UK’s small and medium sized enterprises. 

“Jelf is a terrific firm that has proven a great fit with Marsh. Jelf will continue to look for acquisitions which grow our footprint and improve our ability to serve clients.”

Marsh is not the only big broker keen to buy UK brokers. Gallagher has been relatively quiet in the UK as it continues to digest the 2013 and 2014 acquisitions of Oval, Giles and OAMPS UK. 

For now, the group has sworn off larger deals, and will focus on what it calls “tuck-in” acquisitions, which includes smaller UK deals. 

During the conference call for Gallagher’s first quarter 2016 results, Macquarie analyst Sean Dargan asked Gallagher’s executive team whether Marsh’s plans in the UK were a competitive threat.

Chief financial officer Doug Howell answered: “It’s nice to have affirmation of what we saw too: that there is good opportunity in the retail space in the UK. And I think there is lots of opportunity there.”

Private equity exit

In particular, Howell noted that there was scope to buy brokers owned by private equity houses.

“There are still private equity-owned firms that will have to do something when the time comes, and people realise that it is better to be with a strategic [buyer] than with an independent or private equity-owned [broker]. 

“So we are seeing terrific opportunities there.”

Others agree that there is plenty of scope to buy UK brokers, in particular because many owners are approaching retirement and seeking an exit.

Consulting firm Oxbow Partners partner Chris Sandilands says: “Inevitably, when you look at the statistics on the age profiles of brokers, people are going to be exiting over the next five to 10 years.”

He adds: “I wouldn’t be surprised if there was a big shift from independent brokers to networks or consolidating platforms in the next five years.”

There are also compelling financial incentives for companies to bring a US-style acquisition model to the UK.

M&A adviser IMAS Corporate Finance founding partner Olly Laughton-Scott says that both big US brokers and large private equity houses are being attracted to the idea of broker roll-up strategies in the UK.

He says: “They see valuations in the US as higher than in the UK. Part of the attraction of the UK is believing that the valuations will tend to come together.”

Mid-tier focus

But while big hitters such as Marsh and Gallagher may compete with the likes of PIB and GRP at the smaller end of the UK SME broker market, the bigger buyers are likely to focus on the mid-tier.

Laughton-Scott says: “The costs to a large company of acquiring a small business are considerable. We would therefore expect to see a focus more on medium-sized brokers. They will let the medium-sized brokers do the consolidation, and come in and buy them.”

With the amount of interest being shown from all sides, now is a good time to be selling a UK broker.