Marsh & McLennan's Mercer to Buy 1/3rd Stake in South African Biz - Analyst Blog

Consolidating its position in Africa, Marsh & McLennan Companies Inc.'s MMC globally leading consulting wing by market value, Mercer, announced its intention to acquire 34% stake in Alexander Forbes – a leading firm in retirement, investments and employee benefits sectors across South- and Sub-Saharan regions of Africa.

While the value and other details of the deal remain undisclosed, Mercer's total stake should be around $366 million, according to Bloomberg.

Alexander Forbes' business is spread over 11 countries in Africa. The firm offers a wide array of services that include employee benefits, insurance, retirement and investment consulting solutions for both institutional and retail clients.

However, Mercer has agreed to purchase about 14.9% stake in Alexander Forbes at the latter's   initial public offering IPO on Johannesburg Stock Exchange (JSE), slated to occur at the end of Jul 2014. The remaining 19.1% interests will be bought after the receipt of regulatory approvals.

Growth through Expansion

This is not the first time thatMarsh & McLennan is building business through Alexander Forbes.In Jan 2012, Marsh & McLennan's leading insurance brokerage wing – Marsh Inc. – had acquired Alexander Forbes' brokerage business (Alexander Forbes Risk Services) for about $115 million.

The deal complements the strategic growth goals of both Marsh & McLennan and Alexander Forbes. Alongside, the collaboration with a globally leading consulting firm will enhance the latter's operational efficiencies and enable its clientele to tap the lucrative global markets outside of Africa, where Mercer enjoys a strong foothold.

On the other hand, the deal blends well with Mercer's scale and utility of operations. While the pension benefits and healthcare are witnessing a shift from the public to the private sector in Africa, it is also opening up sizeable growth opportunities within Mercer's pensions, health and benefits, investment and talent consulting segments.

Last year, Mercer also acquired South Africa's leading information provider of compensation and benefits survey data and rewards – Global Remuneration Solutions Ltd. These acquisitions will add to Mercer's client base.

Absence of Major Risks

We believe that the acquisition is crucial for new business production and client retention, thereby strengthening competitive edge in the peer group. Marsh & McLennan also remains financially sound, further eliminating any significant risk on leverage. The minimal adverse impact is reflected in Marsh & McLennan's share price that remained stable in the neighborhood of $52.00 since the announcement.

Currently, Marsh & McLennan carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the financial sector include Blue Capital Reinsurance Holdings Ltd. BCRH, American Express Co. AXP and Erie Indemnity Co. ERIE, all of which bear a Zacks Rank #2 (Buy).