Let’s call the whole thing off

When sale talks between THB and specialist broker PWS Holdings fell apart last week, both parties were left feeling a little bruised.

The discussions for the acquisition by THB of PWS’ Lloyd’s broking and international businesses, which started last autumn, collapsed within a matter of weeks, leaving both companies nursing significant legal costs.

AIM-listed THB subsequently issued a profit warning, saying it was unlikely to achieve analysts’ profit forecasts for the year. Its legal and other professional costs were expected to total about £1m.

PWS’ results in 2007 will also be hit, the company’s chief executive Stephen Card confirmed this week.

Both companies are now considering their next moves, with THB already eyeing up other potential targets in the London market.

So what went wrong?

On paper, the deal looked perfect. PWS was searching for a way to achieve scale in a fast-contracting market while THB was after an acquisition that would widen its international reach.

THB’s group chief executive, Vic Thompson, says the two businesses would have complemented each other’s operations well. “PWS is a well respected reinsurance broker, operating primarily in the international market and offers access to important growing markets in the Far East and Europe as well as South and Central America.”

Card says he was trying to address the problem that PWS was too narrowly focused and too small. “The broker market has contracted and size does matter. We need to grow by acquisition or by being acquired, although we would prefer to grow by acquisition,” said Card.

“There was a cultural fit, THB is a great business and there wasn’t much overlap. THB is strong in the UK and the US, and we are strong in Asia, the Americas and the Middle East.”

But while the deal looked good in theory, it was complicated and it was these complexities that caused it to fall apart.

From the outset, PWS imposed a tough timetable for completion of the deal. The company wanted the negotiations concluded by the end of 2007, about a month after talks were announced, in order to minimise the level of uncertainty for the group and its employees.

But as the deadline approached, the negotiations began to look a little rocky. Key dates in the timetable were missed and later extended. THB made a statement to the Stock Exchange at the end of December saying the pair were still in advanced discussions. But it warned there was no guarantee that the acquisition would take place.

Less than three weeks later, the talks were off. PWS is understood to have pulled the plug when it became apparent that the final deadline of 18 January would not be met.

THB blamed legal complexities for its failure to conclude the negotiations within the agreed timescale.

“We have expended significant effort to secure this acquisition but, in the end, the legal complexities involved proved incapable of resolution within the time both sides agreed for the transaction to be completed,” says Thompson.

“From the outset it was going to be complicated. In the end, it was just not going to be possible to bring the companies together
in a timeframe that suited both parties

PWS said it had to end discussions because extending the timetable further and the uncertainty that would result would not be in the group’s best interests.

“From the outset it was going to be a complicated transaction,” says Card. “In the end, it was just not going to be possible to bring both companies together in a timeframe that suited both parties.”

Sources close to the negotiations say PWS’ large number of overseas offices made the due diligence time consuming and costly. The sale and purchase agreement is understood to have been 600 pages long.

Card dismisses suggestions that PWS was over-strict with its timetable. “There were complexities but that was not the problem.”

Looking forward

The two companies are now planning their next moves.

THB, while sore, is continuing its growth strategy and has already put together a list of potential acquisition targets in the London market.

The company’s chairman, Clive William, says: “We are exploring a number of interesting opportunities.”

Since the sale of its retail division to Towergate in 2006, THB has refocused its business on speciality markets where it sees better growth prospects. It has deliberately maintained a cost structure to support a larger business.

Brokers First City, Windsor and Tyser & Co are reported to be possible targets.

Meanwhile, PWS is on the lookout for another merger partner. Card says: “We are keen to acquire or find the right partner [to be acquired by].”

PWS says it is currently trading at the best level it has for some years and that this is expected to continue through 2008.

“We are not in a distressed position,” says Card. “I have a lot of ambitions for the company.”

This, he says, will include extending the group’s geographical reach and its specialisms. PWS has recently expanded its marine division with two senior hires.

Central and Eastern Europe, as well as the Middle East and Asia also provide good scope for expansion, and may lead to more office openings, says Card. “If we find the right partner we will open an office.”

Offshore energy and aviation are also areas where PWS could look to boost its expertise. Card says: “We are not as capable as we could be [in these sectors]. But they are very volatile in terms of pricing and it is difficult to find good teams.”