The UK broking market is no stranger to M&A. In the 2000s and early 2010s, the big consolidators gobbled up hundreds of small and medium sized brokers, a frenetic race to scale that ultimately didn’t end well for most competitors. With Oval and Giles themselves consolidated into AJ Gallagher, Towergate reeling from its Q1 2015 financial restructuring and Jelf’s Q3 acquisition by Marsh, it is indeed fair to say that this wave of consolidation is over in the UK.
This does not signal an end to UK broking M&A, however. We see four M&A themes in 2016:
It is well known that many principals of broking firms are nearing retirement age and looking at exits. We expect this to lead to a wave of M&A at the smallest end of the sector over the next 5 years or so. We expect a number of “micro consolidating” platforms to emerge and take out many of these brokers – maybe recently launched and Carlyle-backed PIB is one of these?. We fear that many principals will be disappointed with their valuation but will have few options. Few will have prepared appropriately to maximise their exit value.
Oxbow Partners believes that many of the larger brokers will enter a period of digestion. They will move away from pure scale acquisitions and pursue more selective, strategic opportunities. The first type might be acquisitions to enhance operational capability. A probably accidental but possibly prophetic illustration of this shift might be Marsh’s (much reported but never officially acknowledged) aborted acquisition of Towergate in early 2015 but successful acquisition of SMEi, a technology-focused SME insurance broker business, instead in late 2015.
We expect brokers to review their portfolios and determine where disposals could help them optimize value. Are niche businesses value adding or just a management stretch? Could some peripheral portfolios acquired in bigger transactions be worth offloading? Examples of the former scenario might be Towergate’s disposal of Hayward Aviation – although admittedly a likely forced sale – and Marsh’s disposal of its specialist motor business in Kendal is a good example of the latter.
“More of the same”
There are still a number of attractive broker “platforms” in the market – brokers with income in the double digit millions who have the scale to become the next wave of consolidators with the right financial backers. Oxbow Partners sees value in this model but we expect any future consolidation play to be more measured than those of the late 2000s with more focus on strategic “fit” and parallel integration.