Aon-WTW – another key step taken

Aon’s agreement to sell off its US retirement business and retiree health exchange is likely to be seen as another key step as management continue to take a pragmatic approach to getting the Willis Towers Watson (WTW) deal over the finish line.

Reports elsewhere in recent days had focused on procedural matters at the US Department of Justice (DoJ), suggesting it was taking a dual-track approach to Aon-WTW by engaging in settlement talks with the parties over proposed remedies while also prepping for a legal challenge.

But if there was any actual evidence that DoJ roadblocks were about to make the route to completion more challenging, news today of the latest divestments instead signals continued momentum towards a close.

In the statement announcing the sales to private equity firm Aquiline and digital human capital and services platform Alight, Aon clearly stated that the move was directed at the DoJ, to address questions raised by the US regulator with respect to the markets in which the divested businesses operate.

It also said that Aon and WTW continue to work toward obtaining regulatory approval in all relevant jurisdictions.

WTW of course has its own retirement consulting and actuarial business and an established retiree healthcare marketplace in the US that would become part of Aon following the proposed $30bn combination, so it would not be a surprise to learn that the business was the subject of the DoJ’s focus.

As today’s announcement alluded to with a mention of “other potential remedies” in the context of reiterating cost synergies targets of $800mn, the possibility of further divestments remains.

After all, the agreement for the $3.57bn sale of Willis Re, parts of WTW’s Corporate Risk & Broking (CRB) business in Europe and the US and some health/benefits operations to Arthur J Gallagher includes a provision for the buyer to acquire other assets to satisfy regulators on the overarching Aon-WTW transaction.

That remedy package and the sale of Aon’s retirement and investment business in Germany to Lane Clark & Peacock are largely aimed at satisfying regulators on the other side of the Atlantic.

And, as previously reported, competition regulators at the European Commission (EC) are widely expected to give conditional approval to Aon-WTW after ratifying the measures taken to divest businesses.

Until today, US divestments had been modest, with the P&C brokerage subject to what appeared to be surgical cuts to appease the DoJ through the divestment of certain accounts in the Houston and San Francisco offices of WTW’s CRB operation.

Sources have previously said that other US-specific concerns may have included reinsurance broking – but that had been addressed by the Willis Re divestment in the EC remedy package. It has also been suggested that there may be less concerns about the CRB business in the US, given the greater number of options from established rivals and upstarts.

The more significant divestments today point to major efforts by Aon-WTW to address concerns the US regulator has over market concentration and competition in other areas of the business.

It seems unlikely that they would be made without a high degree of confidence that they would find favour with the DoJ as negotiations continue towards a settlement.

Revenues top divestment cap

The other notable disclosure in today’s announcement is that the latest deals mean that combined with the Gallagher and Lane Clark & Peacock transactions, the total 2020 revenues announced or offered to be divested contingent on the WTW combination have now reached $2.3bn.

That is significantly ahead of the $1.8bn divestment cap widely reported on in the Aon-WTW agreement – although in this case it is a moot point.

The divestment cap in the purchase agreement is essentially an Aon term designed so that the acquirer would not be forced to give up more than $1.8bn of revenues to satisfy regulators. But there is nothing to stop Aon deciding to go beyond that level and it would not require shareholder approval to do so.

That’s not to say that the parties will be thrilled at the level of revenues now being divested to progress the deal, but they remain committed to its rationale and the value it will deliver.

There was signalling in the announcement that the combination is still expected to deliver $800mn of cost synergies, and adjusted earnings per share accretion remains on track with initially announced projections in year three and over the long term.

Analysts will no doubt be looking for more disclosure on any revised earnings per share accretion targets for years one and two, however.

Greg Case and his Aon management team continue to assert the rationale of the WTW transaction and the value it will create even at the current level of divested revenues. They will first need to navigate a path to completion that looks clearer on today’s news.