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Morningstar | Marsh & McLennan to Acquire Jardine Lloyd Thompson

Marsh & McLennan announced that it intends to acquire Jardine Lloyd Thompson Group plc, a specialty brokerage business, in a deal valued at $5.6 billion. We’re a bit surprised to see Marsh & McLennan contemplate such an aggressive move. Historically, the company has been content with small bolt-on acquisitions, and it has been over a decade since the company completed a multi-billion-dollar deal. However, we think the deal makes strategic sense and the valuation looks reasonable, assuming Marsh & McLennan can achieve the expected cost synergies. We will maintain our $83 fair value estimate and narrow moat rating.

Jardine’s brokerage business increases Marsh & McLennan’s specialty exposure as well as bulking out its presence in the U.K., Australia, and emerging markets. Management pointed to accelerating growth as a key consideration behind the deal, highlighting the fact that Jardine has achieved average organic growth of 5% since 2012, a bit above the level typically achieved by larger brokers. We like that Marsh & McLennan is focused on expanding its brokerage operations, which we view as the heart of its narrow moat, and the company doesn’t look to be expanding outside of its circle of competence to achieve this growth.

We estimate the EV/EBITDA multiple for the deal at 17.4 times, using Jardine’s 2017 results and current exchange rates. This is meaningfully above the multiple at which we value Marsh & McLennan and the other brokers we cover. However, management expects to achieve $250 million in annual cost synergies over the next three years. Including these synergies would push the multiple a bit below our broker valuations. As such, we view the purchase price as reasonable.

The deal will be financed primarily through debt and will likely inhibit capital return somewhat in the near term, as the company will need to bring leverage back in line. However, management reiterated its capital return goals of double-digit dividend growth and a declining share count. In our view, if management sees the deal as value creative, that should take precedence over capital return, but we appreciate management’s historical diligence in terms of capital return and are pleased that this appears to remain a priority.