Oval, the next chapter

The market is fascinated by the consolidators. With each one there is a running story, a dramatic subplot that has everyone gripped. For Giles Insurance, it is whether Chris Giles can deliver on his bold pronouncements. For Bluefin, it is the relationship with its owner, AXA.

And Oval? Well, Oval is at the centre of constant speculation about whether it will be sold.

Last year the rumour mill was in overdrive. There was talk with insurers over the purchase of equity, coupled with what appeared to be protracted refinancing of its bank debt facility.

Matters were not helped by Chris Giles saying he would like to buy Oval – or fellow consolidator Jelf – after he secured millions of pounds from a private equity house. He was set to make a bid, or so the market chatter had it.

Oval remained tight-lipped, insisting it would stay independent and that there were no plans to sell. But the market was still waiting for something to happen. Then it did.

Phillip Hodson, the broker’s chief executive – showing the negotiating prowess for which he is renowned – hit back and gave Giles a metaphorical clip round the ear in the process.

In a carefully worded statement issued last November, Hodson said Charterhouse, the private equity firm that owns Giles, had made an approach – but the deal was a reverse takeover in which Oval would have subsumed Giles.

It was a masterstroke. Suddenly the focus was on Chris Giles, the motivations of his private equity masters and the future of the Giles brand.

Oval rejected the proposal.

Even Chris Giles had to admire Hodson. “He’s a very clever negotiator,” he told Insurance Times.

Fast forward a couple of months to a cold winter morning at Oval’s City of London offices. Hodson is with Jeff Herdman, the group managing director. The pair rarely talk to the press, preferring to get on with running the business, but they’re making an exception.

Hodson, a former cricketer for Yorkshire and rugby player, is an imposing figure. Herdman, another talented sportsman who played rugby for Wales, is more softly spoken. He says relatively little during the 45-minute conversation that follows, demurring to his boss but chipping in at various points.

Hodson is seen as a master deal maker.

Under his leadership, Oval has made more than 30 acquisitions since its formation in 2003. Annualised revenues now stand at more then £100m. He dislikes the term consolidator, however, preferring to describe Oval as a mini-national broker. Its peers, he believes, are the likes of Marsh, Willis and Aon.

“We’re doing better than expected. We have greater growth, a better quality of people and structure – which is down to Jeff [Herdman]. We’ve expanded into more regions than we thought, although we are still vulnerable in the North East,” he says.

In the past few weeks Oval has reported a strong set of results across its insurance broking and financial services business. Revenues across the group were up 38% to £83m for the year to 31 May 2008 and pre-tax profit rose 16% to £4.6m.

But that was in different economic circumstances. And while Herdman says trading was good in the latter half of 2008, the outlook for 2009 is gloomy.

“All brokers will be affected by the recession,” says Hodson. “But insurance will fare better than other sectors. It depends on how quickly rates harden. We are starting to see that. Insurers are in a pretty good place. Their share prices are marked down because of their investments.”

Oval is well positioned to withstand the downturn, he adds. “We have good profit streams, good people and a good client base. We have an integrated business that is doing well.

“Our vision is to create a £200m national broker in the UK – and we are a bit more than halfway there. It is difficult to say when we will hit the target. Last year, we would have said two to three years. But that’s not the case now.”

Acquisitions are still on the cards. Oval took a break from buying in the summer and renegotiated a £115m debt facility with its banks, but has since finalised a couple more purchases.

Herdman says the greater focus will be on organic growth, however. “It will be even more important now [owing to the recession].”

Hodson adds: “We will be concentrating on performance, cutting our cost base. There will be some niche acquisitions, four or five.”

A “transformational” acquisition has not been ruled out, he says.

“We have looked at the options; there are two or three [potential purchases].”

Hodson won’t name the targets, although he rules out Giles and Jelf. “Look at the top 25 brokers” is all he will say.

Is a big deal imminent? “You can’t do these deals at the moment, but perhaps in the future.”

And what’s the story behind that proposed merger with Giles? “I said what I said to clear things up,” says Hodson.

But back to Oval’s longer-term plans. Hodson has previously spoken of a public listing but this was before the downturn complicated matters. “Have you brought your crystal ball?” he asks.

He insists his focus is on steering Oval through the recession. “My intention is to batten down the hatches. An IPO [initial public offering] is still on the radar. But we are focusing on what is happening now.”

Herdman underlines this: “We are concentrating on the next nine months.”

So if not a flotation, could Oval be sold? Hodson: “There is always the option of an IPO or a trade sale. An IPO is probable but not certain.” It becomes clear he has had enough of this line of questioning.

The conversation turns to the interaction between Hodson and Herdman. What’s their relationship like? Hodson answers: “We say the same things. We have the same values, in terms

of people, teams and leadership. The whole executive team gets on well. Oval has a very flat structure.”

Herdman adds: “We have a good team ethos and that is what makes us successful.

Hodson says: “One thing I don’t like is this focus on individuals – Phillip Hodson, Chris Giles. It is not what Oval is about. We are a team. I could fall under a bus, which I hope I don’t.”

Herdman interjects: “That could be arranged.”

Hodson continues: “There is a danger that the media personalises it too much. Peter Cullum [Towergate’s chairman and founder] changed the direction of the industry and he is worth concentrating on, but the rest are all foot soldiers in a pretty bland industry.”

“We don’t want Oval to be bloody bland!” says Herdman.

It’s not – and whether Hodson likes it or not, there will always be interest in the next instalment of the Oval story. IT