Acquisitions - AJ Gallagher eyes UK brokers

AJ Gallagher is preparing a UK acquisition spree, targeting regional and provincial commercial brokers willing to sell at a multiple of one-and-a-half times top-line revenue.

Chief executive David Ross told PB that, following the firm's purchase of London-based Oxygen Insurance Managers in September last year, he intends to grow its UK footprint further through 2009 and 2010.

"2009 and 2010 will be a period when you see Gallagher emerging in the UK as a large retail broker. At Gallagher, we've focused our acquisition activity offshore for the past few years; the reason is that we pay pretty standard multiples and we know what an appropriate rate to pay for a company is. In the UK, there has been lax discipline and short-term thinking whereby some of the consolidators were fuelling a frenzy that was completely unsustainable with unrealistic multiples applied. There has now been a complete collapse in that regard - some of the hysteria has gone," explained Ross.

Exchange rate

Some of the larger consolidators would disagree. Oli Laughton Scott, partner at Imas, which has been involved as the middle man for a large number of broker transactions, said: "There was a feeding frenzy that has calmed down but good-quality businesses are still attracting high multiples. There are strong defensive characteristics as a sector and within financial services broking has performed extremely well. Any large buyer will try to talk the price down; the strength of the dollar has had a beneficial impact on many Lloyd's brokers, which will underpin their valuations."

Ross explained that the UK is a market in which Gallagher would now be "particularly interested". He said: "We've always taken the view that the UK insurance market is massive. We are a big broker, but we are US-centric. We feel we belong in the UK retail space but we were prohibited from being in it because it was just vastly overpriced."

However, he added that sentiment among sellers is important: "Our biggest problem is that there are owners of businesses who have been holding out on selling that probably now realise they have lost the opportunity to make a huge multiple.

"They then fall into two categories: they are either mature and ballsy enough to say 'I'll ride out the storm and wait for the next cycle', or they are absolutely panicking, the school fees are coming in and they are saying 'I've got to sell up now'. The questions for us are, if a person is approaching us now, are they selling the business for the right reasons and does it fit with our long-term strategy? More importantly, have they adjusted their thought processes to the point where they will receive what we believe to be a fair multiple and be happy with that or will they be bitter? There's nothing worse than giving someone millions and they end up unhappy."

Target

The challenge now for consolidators is to gain cost efficiencies in their newly acquired brokers because, despite firms such as Jelf and Oval reporting high increases in EBITDA, they still need to improve their underlying profit returns. Jelf's pre-tax profits dipped to £3.5m from £4.19m as administration expenses increased.

Meanwhile, John McLaren Stewart has left Bury St Edmunds-based Alliance Insurance Management, which was acquired by Towergate in February 2007, to start up on his own.

This could be a good time for a new entrant in the acquisition market as rivals come under pressure to ensure that their acquisitions are bedded in properly. However, if brokers have not sold over the last few years, it is presumably because they would rather do it their way and remain independent.