Class of 2020 | taizhang@wharton.upenn.edu
Up to fifteen percent of the working American populace have their work benefits processed by Aon Plc (NYSE: AON), an insurance giant that isn’t even based in the United States. The world’s largest insurance broker based on revenue, Aon is headquartered in London and has existed since 1982.
Without doubt, Aon has matured in the insurance marketplace – the crash of ’08 and regulation breaks have caused Aon to divest from the insurance market and buy stakes in major growth markets, like cybersecurity. Aon’s benefits outsourcing business has traditionally been a cash drain that Aon has wanted to offload, and in seeking an exit, Aon has attracted the attention of major private equity firms in the past two years.
That’s why Aon’s held an auction for its outsourcing business in Q4 2016. The winning offer was from The Blackstone Group (NYSE: BX), buying for a valuation of nearly $4.8 billion. The deal gives Blackstone access to a scaled business offering cloud-based human resources management and workplace benefits processing services.
Private equity firms have been heavy investors in outsourcing businesses that cut costs and generate large cash flows, leading to high profits for the private equity firm. Thus, its easy to see why a bidding war between Blackstone and private equity group Clayton Dubilier & Rice LLC ensued.
Although both firms claimed that the deal is intended to create a standalone company that will grow its capital-intensive business, the deal was formulated to give the winning bidder extensive access to Aon outsourcing’s capital structure. Its easy to speculate that the purpose of the buyout is targeted towards purchasing Aon’s large amount of credit, and pricing that credit higher at maturity.
The final settling price of $4.8 billion is a mix of $4.3 billion upfront and $500 million contingent on future performance of Aon’s outsourcing business. Insight on the deal reveals that a large portion of the $4.3 billion upfront will be used in Aon’s massive share buyback program, now in its second quarter.
This deal could be an important catalyst for Aon investors that currently hold shares, as a share buyback would increase the value of existing outstanding shares. This is an opportunity that could yield value for institutional and commercial investors. Aon’s robust fourth quarter results are further evidence of possible future value stemming from the terms of this buyout.
The Blackstone Group’s deal is expected to close in the second quarter of 2017. Should the deal fall through or disagreements arise amongst both parties, there is a termination fee of $215 million obligated to The Blackstone Group.