‘Who will be the super consolidator?’

How close are we to a consolidation of consolidators? The last time we heard this was back in 2008, when private equity house Charterhouse, backer of Giles, tried to merge the broker with Oval. Oval’s then chief executive Phillip Hodson blocked the deal.

Back then, the consolidators thought the markets would pick up and there would be ample opportunity to float. But the economic downturn and lack of a hard commercial market has changed the picture. For a consolidator to float nowadays it needs three things: scale, acceptable levels of earnings in relation to debt, and a strong story to entice investors who could otherwise be ploughing their money into emerging markets.

Three consolidators - namely Giles, Oval and Towergate - still have some way to go to complete their journey towards flotation, which is likely to be the best form of divestment. A merger between any one of these three would make sense in a lot of ways. There could be significant cost savings. On the top line, there could be significant commission uplift on Oval’s business if it combined with Towergate.

Most importantly, a super consolidator would have much greater scale for flotation, attracting the interest of key analysts and investors who typically like bigger game.

There are still significant obstacles in the way of a merger however, principally over personalities and the financial structure of the newly merged business.

Towergate chief executive Mark Hodges is unlikely to consider such a move until he has the processes and corporate governance fully in place.

Finally, a merger could also be trumped by a move from a trade buyer. Oval would be a good fit for Gallagher.
Whatever happens, these will be interesting times for the consolidators as they look for a safe harbour in the choppy seas of the post-financial crisis world.