M&A volume grows in 2019 but mid-sized targets scarce

However, the number of transactions in the £5m to £100m value range, including in the traditional consolidation sweet spot of £5m to £25m, actually fell in the period.

The annual review from the financial advisory services firm, which focuses on mergers and acquisitions, showed that there were 55 deals valued below £5m in 2019, a 77% year on year increase.

This was balanced by the fall in deals valued at greater than £5m, from 51 in 2018 to 38.

According to Imas the scarcity of mid-sized targets forced consolidators to reach down.

In its UK Insurance Distribution M&A Annual Review 2019 the company cited the likes of GRP and Ethos Broking as having announced new deals on an almost monthly basis.

Both models use a hub and spoke system with larger players in a geographic area able to strike bolt-on deals of smaller brokers.

Looking at deals over £5m in value, the experts highlighted that the total of 38 was still ahead of the long-term average despite being 25% down on 2018.

Measured over the period of 2011 to 2019 the long-term average is 29.

“Fewer deal levels above £5m in 2019 is a result of lack of supply, not lack of demand,” founding partner of Imas Olly Laughton-Scott told Post.

Consolidators were behind nearly half of these deals.

Five firms made more than one buy in the 12 month period accounting for 18 of the 38 deals, some 47%.

This was in keeping with the previous year when seven consolidators represented 51% of takeovers in the segment.

A further breakdown showed that the true decline was in the £5m to £100m deal value range.

There were 48 deals of this nature in 2018 whereas there were only 34 last year.

Within this there were only 26 deals in the £5m to £25m bracket, a 28% year-on-year fall.

Imas reported that the aggregate value of transactions in this group was the lowest since 2014, “reflecting increasing paucity of the mid-sized brokers most favoured by consolidators”.

Transactions in the £25m to £100m segment reduced from 12 to eight.

Deals totalling over £100m actually grew from three to four across the years.

Overall, across deals valued above £5m, some £1.86bn changed hands.

The total was down on 2018, however that year was distorted by Marsh’s takeover of JLT. If that deal is stripped out then the annual comparisons show a rise, from £1.26bn to £1.86bn.

According to Imas, the growing scarcity of targets and competition for good purchases is supporting deal pricing.

Valuations have continued to inch up, with the average deal pricing now above 9x Ebitda.

The subsectors showed a range of results.

Those valued above £100m were the most expensive with an average 12.4 multiple while those £25m to £100m grouping came in at 9.5x Ebitda.

The sector just below – £5m to £25m – were priced at 9x Ebitda.

Of the 38 deals, 15 were for commercial lines business and six for specialist brokers, which IMAS said was where consolidators remained focused due to retention being high.

Though there was less appetite for personal lines there were still five deals last year, along with three for Lloyd’s brokers, one reinsurance broker and eight managing general agents.

Both commercial and personal lines deal counts were down on 2018 when there were 26 and seven respectively.

Looking to the future partner at Imas and co-author of the report, John Nisbet said: “If anything we expect consolidators to make even more effort in making direct approaches, given the scarcity of supply and the hope of picking up an unadvised cheap deal.

“If entrepreneurs’ relief is abolished we do not expect private sellers to withdraw.

“This is the new normal and owners will adjust - the current rate of capital gains tax is at a historically low-ish level of 20%.”