This is a win for Aon.
The company can get started on its plans earlier. Its dates for EPS accretion from the deal move up by a year to 2026, and it is projecting additional free cashflow of $300mn in 2025 and $600mn in 2026. The 19 million shares issued as part of the consideration compares to an earlier expectation of 20 million to 22 million.
Aon also avoids the damage that could have been done to NFP by competitors had it been stuck in 18 months of deal purgatory.
In addition, the purchase price comes down $400mn, reflecting NFP’s reduced M&A outlay from the accelerated closing.
And it saves Aon’s management the distraction and career risk that a second fight with antitrust watchdogs would have caused.
However, it creates uncomfortable optics around the valuation compared with a 2025 close, marking it out as a slightly awkward-looking win.
Those optics reflect the higher multiple Aon has to pay as a result of NFP being smaller on close than if it had a year-plus of further growth runway. This is partially – but only partially offset – by the $400mn or ~3% reduction in the consideration.
In conception, the original deal construct made Aon bear the financial risk around a delayed close resulting from antitrust enforcement action by paying a higher price. If the risk came to pass, NFP’s growth would mean that the valuation multiple came down. This is where the 15x multiple came from in Aon’s initial release (15x projected 2025 adjusted Ebitda of $895mn).
We don’t have full transparency around the numbers. However, banking sources put the pro forma Ebitda at the time of the deal at ~$700mn. Even if we assume rapid Q1 growth, and use ~$750mn as run-rate earnings, the multiple is still north of 17x Ebitda. Using slightly more conservative assumptions on growth, you end up rounding to 18x.
(These numbers are always subjective up to a point because while the numerator is clear, the denominator reflects the degree of add-backs that are allowed by the buyer. Comparisons are rarely truly apples-to-apples.)
Whether it is 17x or 18x Ebitda, it’s clear that for 2024 it’s an above-market multiple for a mid-market platform – and potentially significantly above market. (Few data points actually exist.)
Of course, NFP is a better-than-average platform, and warrants a premium to a market multiple – as Eric Andersen rightly told this publication in February not all platforms are created equal.
However, given the private equity coolness around $10bn+ broking assets and the challenges of going public, Aon was in a strong negotiating position with sellers Madison Dearborn and HPS.
Multiples can quickly be rendered irrelevant in deals driven by smart strategy and backed up by good execution, but Aon dug deeper here than one would have expected.
The imperative to spotlight NFP as a future growth driver was emphasized by a weak print on organic growth in commercial risk where Aon put up 3% organic growth, versus a consensus 4% forecast, and 8% at Marsh.
With Aon also missing on earnings, the stock traded down 6.8% on the disappointment, somewhat overshadowing the NFP news.
Success will be based on delivering “best of both” worlds
I continue to believe that Aon made the right move in acquiring NFP, and had advocated for a move into the fragmented US mid-market space via such an acquisition since last spring. (For background see: “Aon: The moment for dealmaking”)
The deal demonstrates a willingness from Aon to tilt further towards growth including through the deployment of cash in M&A, which sends an important signal about long-term franchise-building.
By buying NFP, Aon gives itself the capabilities for a roll-up M&A strategy. It also provides it a larger TAM for the distribution of its product set. And it provides a fresh cost base to optimize and drive margin, with NFP 800 bps short of Aon’s margins (and probably more once you bring it into a public company treatment).
My view remains that the success of the deal will turn on whether Aon is able to show the deftness of hand required to create a true “best of both worlds” outcome. This is my version of Aon’s “independent and connected” mantra.
It describes a state in which NFP is brought close enough to realize cost and revenue synergies, but retains sufficient autonomy not to lose its entrepreneurial core.
This is a challenging tightrope to walk – and one that Aon needs to get right not just for a year or two, but over the long term.
What are the next steps to create value?
With the deal now closed, the nitty gritty work can begin, as Aon and NFP work to prove they are better together.
There are some obvious areas that will receive early attention. First, it is understood that Aon will look at the feasibility of establishing “NFP Client Treaty”, a follow-form facility for the mid-market mirroring the one it has built in London.
Second, it is likely to look to connect some of the specialty product offerings that exist within Aon to NFP’s distribution, across commercial risk, health and wealth, while giving NFP’s brokers access to data tools.
Third, Aon is expected to open up its global servicing capabilities to NFP, as it looks to hold onto clients that previously would have outgrown NFP as they started to internationalize.
Fourth, Aon has much more sophisticated carrier management and central placement than NFP, with work likely to develop this.
Fifth, as NFP is connected to Aon’s shared services and data platform – Aon Business Services – there is likely scope to start realizing some cost savings. (Cost savings were projected at a conservative-sounding $60mn, versus a far more ambitious $175mn of revenue synergies.)
Aon, the M&A company
Even pre-NFP, CEO Greg Case told this publication that Aon’s approach on capital deployment had flexed, reflecting its increased operating leverage resulting from its margin growth.
However, it is understood to continue to test all capital deployment via a return on invested capital model that gives M&A deals a high hurdle rate, which we estimated at 12-14% last year. It reiterated in its Q1 results presentation that it considers buybacks to be its highest return form of capital deployment.
In this context, the company’s approach to M&A will be watched closely.
A degree of caution seems likely at least in the first year with the firm working to de-lever, as well as seeking to balance the demands of the buybacks that have been a hallmark for so long, and the capital needs of NFP.
NFP has historically acquired $40mn-$55mn of Ebitda per year, and CEO Doug Hammond told this publication in February that the company had its largest ever pipeline, and expected 2024 to be “a fantastic year from an M&A perspective”.
Hitting this kind of level seems like a base case for 2024, but NFP also now has the currency of Aon’s stock, along with the expectation of more cash to deploy.
Beyond the near term, though, Aon is likely to be eyeing larger opportunities that are emerging from The Squeeze on private brokers. Hammond told this publication in February that he felt NFP had had the operational wherewithal to integrate a multi-billion platform deal, and could have done so at any point over the last five years.
Importantly, the larger end of the market is where there is more opportunity, with $25mn-$100mn Ebitda deals still drawing strong interest, including from private equity. Above this, and particularly at the $500mn+ Ebitda level and above, there is a real lack of clarity around exits.
AssuredPartners has been the canary in the coalmine for private equity coolness on large assets with low levels of integration. And, as covered at length earlier this month, getting these businesses ready for an IPO looks like an Everest climb.
A merger into NFP with some cash and liquid Aon stock could be one of the few available paths for the larger levered roll-ups.
Another area to watch over time will be the geographical extent of Aon’s ambitions in the middle market. NFP is overwhelmingly a US business, with some operations in Canada, and modest operations in the UK and Ireland.
But given the internationalization strategies seen from the likes of Brown & Brown and Acrisure – with other US brokerages currently fact-finding in Europe – it is plausible that Aon has bought an option on a global mid-market M&A strategy via NFP.
For a long time, Aon was not perceived as an M&A company as memories of Benfield and Hewitt faded. That perception seems likely to drop away.
Insurance Insider US provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Insurance Insider US.
Scan here to download the app