Hub raises U.S. stake

Broker network consolidator Hub International Ltd. (TSE: HBG) has acquired a major U.S. brokerage, Kaye Group Inc. (Nasdaq: KAYE), for about US$118.6 million. The deal is subject to regulatory approval and the consent of KAYE shareholders, who will receive the equivalent of US$14 a share if they accept the combined cash and paper offer on the table.

The Kaye group has office locations in New York, Connecticut, Rhode Island and California, and generated revenues of US$57 million for the first nine months of this year (US$68.7 million for the same period in 1999). The brokerage sells insurance as well as risk management and underwriting services. The group’s total asset worth at the end of September last year was US$152.1 million.

The latest U.S. acquisition, which is expected to be finalized within the second quarter of this year, will boost Hub’s total annual U.S. revenue to more than US$100 million. Hub is reported to be close on finalizing another U.S. acquisition that will likely add a further US$40 million to the group’s coffers for 2001. Hub’s first advance into the U.S. market occurred around mid-1999 when it purchased Chicago-based Mack & Parker, which at the time generated Cdn$20 million in annual revenue. Subsequent acquisitional growth has resulted in Hub establishing a presence in major centers from Boston, New York, Chicago through to the West Coast.

In terms of the Kaye deal, Hub has agreed to pay the brokerage’s shareholders US$9.33 in cash per share, as well as US$4.67 of five-year subordinate convertible debentures of Hub International. The debentures are convertible into common shares of Hub at a value of Cdn$17 a share. Under the terms of the offer, Hub reserves the right to replace the debenture portion with an equal amount of cash. Hub’s parent owner Fairfax Financial Holdings Ltd. (TSE: FFH) – which holds a 40% stake in the network consolidator – has agreed to support the transaction by purchasing at least US$35 million of Hub International convertible debentures bearing the same interest rate and conversion price as those issued to Kaye shareholders.

Kaye Group president Bruce Guthart has been appointed a director of Hub International and made president of the network consolidator’s U.S. operations. Guthart has also agreed to reinvest into Hub International the taxed proceeds he receives for his holdings in Kaye Group. Guthart says, “the combination of operations makes terrific sense for both organizations”. Hub’s CEO Marty Hughes adds, “in addition to Kaye’s position as a prominent New York broker, Kaye has an established reputation as an innovator among producers and insurance carriers in program business”.