Charming the market

Cobra had a challenging move onto the Alternative Investment Market on 5 July this year, with the business valued at close to £37m. The flotation was a culmination of nine months' work, although chief executive Steve Burrows says some firms can turnaround a flotation as quickly as twelve weeks given the right circumstances. However, this one took far longer to implement and the initial deadline of April was not met, partly because Cobra's complex accounts and reports had to be redone going back three years as would be done for any amalgamated company.

Unusually for a listed company, 93% of the shares are owned by 13 of the company's 18 directors. This was after a long haul of investor roadshows where Burrows jokes he learned the script backwards in Chinese. He says: "They are long days and it is always the same presentation. The amount of work and stress that is involved is enormous. We were doing the same presentation for 40 minutes to an hour, five times a day, anywhere in the country. Our travel costs were huge." He adds warily: "The trick is to keep the same enthusiasm for the last one as the first one."

Although there was plenty of interest in the shares, there were requests for the share price, 97p or above, to be lowered. However, Burrows was not prepared to negotiate on a price agreed with stockbrokers and analysts as "reasonable". Floating in a busy period, July, Burrows says there was a queue outside investors' doors and the choice was to raise the £10m war chest at a reduced price in the 80p range or to seek alternative finance to give the firm less liquidity.

His quest for the £10m funding failed, but a £7m injection of capital from business partners, a combination of industry and non-industry assistance, put Cobra in a strong position. The capital is a mixture of loans, including some that were interest-free, and advanced commissions. Burrows cannot tell the press who these partners are as he says he is "under a confidentiality agreement". Is there the potential for more? "If it is the right deal then there is the facility for insurers to help fund it, especially on a specific deal," Burrows says.

Given the disagreements on price, the long days and reams of paperwork, is Burrows disappointed with the process? He is bullish in his response: "The only disappointment was that we did not float as quickly as we would have liked (March and April)."

A group of friends, business associates and family bought £1m of shares covering the flotation costs and a staff share scheme is in the pipeline. Burrows comments: "We believe as we grow they (the investors) will come on board; 60% of investors have us on watch so they may reconsider. For example, next year we may be able to raise £10m for 15% of the business because the share price has gone up." Burrows adds: "We are difficult to compare and so a few investors struggled to understand the difference between us and some other floated brokers."

One of the reasons the floatation took so long was because Cobra is made up of several parts. Cobra Holdings was created at the beginning of 2006, placing six companies under its banner, so allowing it to establish a single management structure. Each company has its own targets and its own board that reports centrally.

In 2001, two rival regional brokers, Lincoln Tulbury and Truman Insurance, merged to form Truman Lincoln. Two years later, Truman Lincoln merged with competitor BKG Group, which has an independent financial services arm, to form the Commercial Broking Alliance and ultimately the Cobra Network in 2004. Since then it has established a network of 121 brokers with around £250m of gross written premium in just three years. Burrows says: "We set up the network to compete with the larger brokers and asked a few friends to join us. We told insurers that within two years we would be 15 brokers strong with £85m in premium; we became 75 brokers and £200m of premium in that time. It grew way past our original expectations."

Burrows believes the no-fees model and the £1m gross written premium commercial base is a healthy entrant. He adds: "For no obvious reason we are having more enquiries than we have ever had before; it has increased by over 50%. The reason networks became relevant was because of the introduction of the Financial Services Authority's regulations. The date (14 January 2005), however, was not a catalyst for companies to become members, though the regulation requirements have since escalated." Cobra carries out simulated Arrow visits on its brokers and after discussions with the FSA, Burrows thinks the watchdog may want networks to eventually "report as one".

The target for members of the network was originally set at 125 because ideally the company does not want more than one broker in the same high street, reflected in the fact that Cobra members are entitled to give reasons why others should not be able to become a member. Although there are members across the country, there is a very small number in the south-west and north-east where the network is concentrating its efforts. Burrows believes it has the potential to double in size over the next two years and network members are expected to place over 65% of their business through Cobra's preferred partners, comprising seven insurers including the company's London Markets operation that was set up to take specialised insurance such as high-risk liability.

Burrows remarks: "We hope the advanced wordings and incentives are attractive for the brokers. There are enhanced commissions if they have arranged some types of insurance."

Targets

Cobra has its own underwriting arm that has products for office, retail, blocks of flats and commercial combined up to £5,000. It is co-insured by five panel insurers with Axa as the lead, and there is also a specialist commercial combined of between £5,000 to £50,000 with St. Paul Travellers. The target is £8m of premium by the end of 2007, increasing to £18m by the end of next year. Burrows says: "We know there is already £18m of packaged small business via the network with those on the panel. It will be transferred to Cobra Underwriting, which will underwrite on behalf of the insurers. At the moment it is only available to members." He adds there are plans to try and double the £5,000 premium limit.

Cobra is deeply involved with difficult construction trades such as scaffolding and tunnelling, both of which come direct to Lloyd's from other brokers or their insurance broking side. The Amateur Football Association is one of their biggest accounts and they are also big in motor trade. Burrows says: "We want to grow on the high-risk liability and professional indemnity side and have taken on a reinsurance team." This team is part of the international division, which includes business in Asia and North America.

Cobra's broking arm owns £115m of gross written premium, of which 90% is commercial. The company has an expansion ambition of eight acquisitions a year of which Burrows says it will be no less than £25m of GWP a year, with plans for it to exceed £50m. There is a 'hub and spoke strategy', which means Cobra will link established regional brokers to smaller independent firms within a local area, with the smaller firms either being integrated into the hub or remaining as satellite offices, or 'spokes'.

One such hub was founded with the purchase of West Byfleet-based £4.5m GWP Tubbs, negotiated prior to the admission to AIM, which was followed with combining the business with £2m GWP Farnham-based KW Batten. Both businesses will be run from West Byfleet and will be called Cobra Tubbs Batten.

A "much larger" deal is in the pipeline and Cobra is holding discussions with six brokers, three of which are members. With the reduced release of shareholdings there is now the potential to offer cash and shares in any future deals. In addition, Cobra could tap funding from banks to find more money to make purchases as their debt gearing is around 10%.

Going forward

Cobra is already strong around London and has offices surrounding the capital in Croydon, Caterham and Woking. Therefore, the company is looking to buy and branch out to the Manchester area, Eire and Northern Ireland and the south coast, with Southampton, Birmingham, Bristol and an as-yet unnamed area on the east coast all being suggested.

Burrows explains the type of acquisition target: "We are not simply looking at brokers that are retiring. The more shares they take the better, as it shows they are interested in the group going forward. We are looking for the ones that are more aggressive and that want to build a business and want autonomy. We see that as a better plan than just looking at retirement companies."

Burrows thinks there are around 2,500 to 4,000 brokers that "know what they are doing", and he reflects: "They are reducing rapidly in number ... everybody wants to buy a broker!" Along the acquisition trail Cobra has come across Towergate often and Jelf once. He says: "We don't tend to go into competition and I don't think they do either. We offer non-binding heads of agreement and lay down the terms of what we are suggesting they purchase for. If they sign that then it gives us a three-month window to discuss candidly with them how it will happen. Hopefully we will then agree terms and buy it within the three months."

In March 2008 Cobra may consider going back to the market for more funding, and within 365 days of floatation firms have a window of opportunity to ask the market for more funds, having to produce only a reduced set of paperwork comprising an admission document and a long-form report. Burrows comments: "If we don't need the money we won't go back."

Burrows believes a previous reported Cobra target of £500m GWP has been misinterpreted and adds that the soft market makes it hard to make projections. He says: "Given we are at around £400m it is not so hard to get to £500m, especially in a hard market."

The first interim reports of Cobra as a listed company will be available by the end of September, with the full-year results coming by the end of March 2008. Last year's operating profit was £1m, with identifiable costs of £1m in investment in IT and a turnover of £11.6m. The most profitable part of the business is the network, although Burrows has ambitions for this to change to the underwriting division.

The challenge is now for Burrows and his team to prove the investors wrong and make the 97p float price seem like a bargain. The market has already seen Jelf's share price more than double since flotation, so it will be intriguing to see if Cobra can begin to replicate this success and whether insurers will soon be buying stakes in the business.

Burrows reflects: "In hindsight we would have started the network earlier. If we had known what we know now we would have started 10 years ago."

CV - STEVE BURROWS

2007: Chief executive officer, Cobra Holdings

2006: Chairman, Cobra Holdings

2003: Chairman, Cobra Network

1996: Chairman, BKG group of companies

1988: Founder and managing director, Burrows, Keith and Associates

1987: Director, Berry Birch and Noble

1982: Account manager, Berry Birch and Noble

1978: Commercial underwriter, SunAlliance.