Arthur J Gallagher & Co. Expands in Canada - Analyst Blog

Arthur J Gallagher & Co. AJG has inked a deal to take over an 87% stake in Noraxis Capital Corporation from RSA Insurance Group Plc. This deal underlines the company's efforts to strengthen its presence in Canada.

The transaction is expected to close in July, pending regulatory approval. The remaining 13% will stay with Noraxis employees.

The transaction will cost Arthur J. Gallagher & Co. $400.3 million or C$435.5 million ($387.5 or C$421.6 million in net cash less the value of assets acquired).

Funding the Acquisition

Arthur J. Gallagher & Co. intends to finance the deal by deploying additional long-term borrowings and its line of credit.

Acquisition Rationale

Noraxis ranks among the top-five Canadian insurance brokers providing retail commercial, personal and employee benefits insurance products and services. This acquisition will immediately place Arthur J. Gallagher & Co. in a premier position besides consolidating its presence as a major player in the Canadian employee benefits business.

Canada is the 10th largest economy and has the eighth highest per capita income in the world. Reportedly, the Canadian commercial insurance market will outpace Canadian GDP growth. This acquisition will hence help it to capitalize on opportunities and improve its growth profile.

Synergies of the Acquisition

Arthur J. Gallagher & Co. estimates the buyout to be accretive to earnings per share by 7 cents in 2015 and another 3 cents by using additional tax credits. The company also expects its share in revenues to be $110 million and $42 million in net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables (EBITDAC).

However, it also expects integration costs of C$2 to C$3 million per quarter through 2015.

Commercial Lines of business of Noraxis that largely focus on middle-market clients will provide opportunities to bring Arthur J. Gallagher & Co. full range of products and services to the existing and potential clients of the former. This business line is estimated to generate C$92 million of annualized revenues in 2015.

Leveraging Arthur J. Gallagher's e-commerce distribution model, Noraxis' Personal Lines of business can enhance its operations. This business is estimated to generate C$27 million in annualized revenues in 2015.

Employee Benefits business of Noraxis will expand Arthur J. Gallagher & Co. employee benefits consulting and brokerage services in Canada. This business is estimated to generate C$19 million in annualized revenues in 2015.   

Arthur J. Gallagher & Co.'s growth story looks impressive with the recent acquisitions. In the first quarter of 2014, it made nine acquisitions with annualized revenues totaling $17.8 million. Moreover, the company has already announced seven buyouts in the ongoing second quarter.

Arthur J. Gallagher & Co.'s brokerage operations in Canada generated C$28 million in revenues in 2013. With the recent acquisition, the top line is expected to improve.
    
Other insurance brokers in news for acquisitions

Marsh & McLennan Agency LLC (MMA), a subsidiary of Marsh & McLennan Companies, Inc. MMC, has acquired Friendswood, TX based VISICOR, a full-service employee benefits brokerage and consulting for an undisclosed amount.

Also, Brown & Brown, Inc. BRO recently acquired the operating assets of Pacific Resources Benefits Advisors, LLC.

Zacks Rank and Other Picks

Arthur J. Gallagher & Co. carries a Zacks Rank #3 (Hold). A better-ranked insurance broker, AON plc AON can be considered for investment. The stock carries a Zacks Rank #2 (Buy).