Jelf at the crossroads

As one industry source says: “It’s the perfect storm.”

Five years ago the clouds seemed a long way off when, fuelled by cheap credit from the banks and a stock market listing, Jelf began transforming itself from small-time provincial broker into one of the big consolidators. The West Country firm splashed out on buying brokers in its backyard, establishing itself as an industry household name. Only Giles, Oval and the biggest beast in the jungle, Towergate, could rival its appetite for acquisitions.

But the recession ended that, and now Jelf has some decisions to make. Chief among its headaches is a sizeable sum of deferred payments to business owners who sold up to Jelf during the consolidation boom.

This has contributed to a stagnating share price, as investors shy away from a debt-laden business that is lacking growth opportunities. Private equity backer 3i, under pressure to pay

off debts, is getting twitchy and is reviewing its stake. Market commentators are left wondering how it has all come to this and what is next for Jelf?

Alarm bells first started ringing when Bruce Carnegie-Brown left private equity investment firm 3iQPE in April this year. Since then, 3iQPE has been rolled into its parent, 3i. In February last year, 3i invested around £30m in Jelf in return for a 27.9% stake. Now, buyers are concerned about the fabric of the business.

The wealth management arm has been hit by the recession and revenue dropped 5% to £4m for the six months ending in March compared to the same period last year. Its employee benefits book grew only modestly, from £3m to £3.12m, as companies focused on making redundancies rather than corporate pensions.

Perhaps most worrying are the high prices Jelf paid for its acquisitions during the boom years, leaving it with a £33m debt burden. Money is owed mainly to its vendors in the form of deferred payments.

Its 2008 accounts show that in the past year Jelf has been earmarked to pay back £13.5m in deferred payments and faces forking out another £12.5m over the next four years, dependent on performance.

So it’s payback time and the situation is all a consequence of splashing out £116m on acquisitions from 2005 to 2008, which the market now looks back on those days as peak prices. Some of the big-name buys included Lampier Group for £20m and Clarke Roxburgh for £28m.

One industry commentator says: “I think they’ve got a big problem. They cannot borrow any more, so they are going to have to grow organically.

“With their share price at an all-time low, you would have thought 3i are not very comfortable.”

These difficulties have done little to encourage investors.Three years ago, the share price was 120p. It now hovers around the 50p border on the Alternative Investment Market.

Chief executive Alex Alway has to regularly update the market, adding another pressure to the creaking business.

All these problems, in addition to 3i’s willingness to sell its stake, have spurred Alway into action. His bargaining chips lie in the fact that the business still shows some potential. In the six months to March, earnings before interest, tax, depreciation and amortisation grew 11% to £3.5m, compared with the same period last year.

Sections of the business are still showing organic growth and his main book is commercial lines broking, something likely to arouse potential bidding interest.

Determined to stop the share price sliding any further, Alway is looking for a transformational deal that will secure the firm’s future. Essentially, he has five options, ranging from selling to a fellow consolidator to performing a perfect turn by securing fresh capital from a new private equity backer, delisting from the stock market and doing a management buy-out.

Here Insurance Times considers the feasibility of each of these possibilities.

Option 1: Sale to another consolidator

Possibility rating: 7 out of 10

Most commentators agree that selling to a consolidator is the most feasible option, but it’s fraught with difficulties. Who wants a slice of the action?

Market sources say Towergate is not interested, as it pursues a path of organic growth and smaller-scale acquisitions.

Bluefin has an acquisitions war chest, but chief executive Stuart Reid has ruled himself out, saying: “Even though this business could be broken up, it is still of size and we prefer the small and beautifully formed that we can bolt on to existing branches, rather than take something of this significance.”

That leaves Oval – which is more interested in sorting out its own deferred payments – and Giles. It has the financial muscle, and chief executive Chris Giles is looking for a transformational deal, but as one source says: “Alex Alway would do a deal, but he wants the top job wherever he goes, and no one will give him that.”

The one other option is Brightside, which has already thrown its hat in the ring. Chief executive Arron Banks says he’s interested, but only at the right price. “I believe it will probably be broken up and sold into bits. We’re West Country-based, they’re West Country-based and have quite a lot of business locally that would fit in quite well,” he says.

The possibility of Jelf becoming a broker-owned insurer is remote. Insurance Times understands 3i was looking to sell its stake to one of the big three insurers – Allianz, RSA and Aviva – but its sales pitch fell on deaf ears.

Option 2: A partial sale of the business

Possibility rating: 5 out of 10

A partial sale would see Jelf’s non-core assets – its wealth management arm, employee benefits and healthcare management – sold off. That could be used to pay off 3i and/or provide the money for the deferred payments. In an ideal world for Jelf’s management, it would leave the business to focus as a commercial lines broker.

But the market remains sceptical about the value of the non-core assets. One source says: “The financial services element is always under some strain. Life and pensions, as it used to be called, is a tough business to be in, so that would not be very attractive.

“Private healthcare, of which there is quite a lot, is not hugely attractive because it tends to be high commissions upfront and then small commission there on. So the real jewel in the crown is the general broking side. But that would be affected by the prices paid in the last two or three years.”

The final snag is that this would destroy its stock market value. A move to divest a large part of the business may have to be preceded by a delisting, which is expensive and complicated.

Option 3 : A loan deal from banks or insurers

Possibility rating: 4 out of 10

Could Jelf secure a fresh loan from one of the banks? Bill Cooper, who leads financial institutions relationship management for Lloyds TSB Corporate Markets, says that the banking group has around $14bn (£8.37bn) to lend to the UK economy, with an appetite to target the insurance industry.

But one market source tells Insurance Times that the banks are turning off the taps of cash to highly leveraged business, and Jelf is likely to be one of those.

Elsewhere, insurers are likely to turn their noses up at Jelf. As one source puts it: “What value is there? The business is going nowhere, so why would they pick Jelf? RSA has already shown its hand by lending to Oval.”

Option 4: Chief executive secures private equity backing, delists, and performs a management buy-out

Possibility rating: 1 out of 10

This would be a dream move for Alway. Not only could Jelf be given access to fresh capital, but Alway would be able to remain in the hot seat. In reality, though, it would require Alway jumping through a series of burning hoops.

How would Alway go about getting a private equity backer on board? It is a big ask – the new backer would have to pay off 3i and have enough faith in the spluttering Jelf business model to help it through the recession.

One source says that there is a reason Alway hasn’t gone for this option before now. “To go through the cost and expense of delisting and then have enough money to do an MBO; it’s hard to see that there would be enough value for a private equity company. If Alway could do that, he would have done it already.”

Option 5: Renegotiate deferred payments to former owners of acquisitions

Possibility rating: 4 out of 10

In the past year, Jelf has had to pay £13.5m to former owners of businesses that it snapped up during the consolidation years. It has a further £12.5m to pay back over the next four years.

Alway could renegotiate with these former owners and ask for more time. It would give him

breathing space as he searches for his transformational deal. In the meantime, the economy could rebound, boosting its coffers set aside for deferred payments.

It’s an option that Alway would probably be happy with. Whether those business owners would agree to play ball is a different matter. IT