No big deal


Following the collapse of negotiations between THB and PWS, Olivier C Laurent examines the reasons for the failure of this complicated deal and the implications it could have for future deals between Lloyd's brokers

News of the failed negotiations between THB and PWS has highlighted problems the Lloyd's broking market is currently facing in what some call "a perfect storm" of detrimental economic trends.

While consolidation is rampant within the UK provincial broking sector - with the likes of Towergate and Axa signing deal after deal - mergers and acquisitions in the Lloyd's market have been limited in the last year.

Olly Laughton-Scott, managing partner of corporate advisory firm Imas, comments: "We have seen a dramatic rise in consolidation in the UK commercial and provincial markets. However, this is not matched in the Lloyd's market; this is due mainly to the difficulty of combining two Lloyd's businesses. In addition, there are only a few opportunities to combine Lloyd's brokers."

Opportunity knocks

Such a rare opportunity lay at the centre of THB's bid to buy the Lloyd's broking business of PWS International and overseas interests of the PWS group. THB had been looking to expand in "different areas, both geographically and also new markets, such as reinsurance", according to Vic Thompson, group chief executive at THB. PWS, with its international footprint, was the perfect fit. THB would have paid up to £22.5m for most of PWS's general insurance business.

However, talks were terminated last week. THB broke off the negotiations with PWS in light of the legal complexity the deal brought, with a source close to the companies saying: "The sale and purchase agreement was 600-pages long. That shows the complexity of the deal and the legal issues it involved. In addition, PWS had set a deadline for a deal to be finalised, and THB could not do it when you consider all the legal issues surrounding the deal." (Post, 17 January 2008, p3).

In February 2007, PWS hit the headlines when the firm brought to the attention of the Serious Fraud Office the fact that the company had held public monies for improper payments (Post, 8 February 2007, p1). PWS chief executive officer Stephen Card denies the allegations had any impact on the THB deal; the SFO has yet to indict the four executives at the centre of the allegations.

News of the failed talks was swiftly followed by its financial implications. Last week, THB announced that its profits would take a hit as a result of the abrupt end in negotiations. The cost was put at £1m - roughly equivalent to THB's profits. In a statement, THB's board said that it "does not have a reasonable expectation of attaining the level of profits forecast by analysts for this financial year".

An outside view

Looking from the outside in, Toby Esser, chief executive of Cooper Gay, says: "It makes you wonder why they didn't get advice on the probability of success. It's a major problem for THB. The shares plunged when they announced the negotiations, and they plunged further when they were called off," (see graph, above.)

Another market source claims that PWS' pension funds and bank debts problems were what brought an end to the deal, as it would have been difficult for THB to make the business profitable enough to make the economics work.

However, THB's failure is perhaps more symptomatic of the general situation within the Lloyd's market. Mr Esser says: "A lot of deals fall apart. I think it has to do with the complexity of Lloyd's brokers. They have very different models to retail brokers."

While in 2007, overseas companies such as Lockton and Hilb Rogal and Hobbs entered the London market with acquisitions of Alexander Forbes and Glencairn respectively, similar firms are now more cautious. Mr Esser explains why: "Overseas companies and private equity firms buying into Lloyd's do not always get what they expected. And with the sub-prime crisis, it has become more difficult to get the debt required to make these acquisitions. There are not that many US players left looking to buy Lloyd's brokers; and now they have more problems locally."

He adds that HRH's acquisition of Glencairn set a benchmark in terms of asking price, which forces exclusivity on negotiations and increases the chances of deals falling apart. To this, one has to take into consideration the soft market, the poor exchange rate, that London is one of most expensive cities to do business in, and the cost of compliance going up. Mr Esser calls it the "perfect storm", adding: "It's hard to make money, and one only has to look at the nature of everybody's numbers to realise that."

But, far from being a deterrent, this perfect storm could lead to UK-based deals between Lloyd's brokers. Faced with the difficulty of developing their operations and boost their profits, brokers will look at non-organic ways to grow. In fact, this was the basis of THB's bid to acquire PWS.

Scanning the horizon

Both Cooper Gay and THB say they are on the lookout for new opportunities. Indeed, soon after announcing the termination of talks with PWS, THB revealed it had a fresh target in sight. A spokesman for THB told Post: "We are already in discussion with another Lloyd's broker to acquire. We had studied the market over the past year, and had a range of targets. We've moved to the next one." The names of Firstcity, Windsor and Tyser and Co have all been flagged by the market as probables on the THB list of targets.

And Cooper Gay is also in an acquisitive mode, according to Mr Esser. "Our view is to find businesses that are similar to us, but who don't quite have the infrastructure or the management. But, it remains difficult out there; the market needs a different management philosophy."

This leads Mr Laughton-Scott to conclude that he does not expect to see too many deals coming to fruition in the near future. However, Mr Thompson disagrees, and so does Mr Esser, who says: "You can expect a lot of action in the next 12 to 24 months." Time will tell us who is right.

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