Arthur J. Gallagher signs agreement to acquire broker network Noraxis

Arthur J. Gallagher & Co. has signed a $422-million agreement to acquire Noraxis Capital Corporation – a Canadian insurance broker network that provides retail commercial, personal and employee benefits insurance products and services – that, if approved, will leave the Illinois-based company holding majority equity interests in Noraxis.

Upon completion of the transaction – which is subject to regulatory approval and is expected to close this July – Arthur J. Gallagher will hold approximately 87% of the equity interests in Noraxis.

The remaining 13% will continue to be owned by various management employees of Noraxis, notes a statement from Arthur J. Gallagher, an international insurance brokerage and risk management services firm that employs 4,500 staff across the United Kingdom, Australia, Singapore, Caribbean, Canada, Chile, Norway and New Zealand.

Arthur J. Gallagher is paying net consideration of $422 million (US$388 million) for its 87.1% interest. In 2015, Gallagher expects results from Noraxis operations as follows: total Noraxis revenues of $138 million and EBITDA (earnings from continuing operations before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn-out payables) after synergies of $52 million. Arthur J. Gallagher’s share at 87.1% will be $120 million (US$110 million) in revenues and $45 million (US$42 million) in EBITDAC after synergies, the statement notes.

EBITDAC after synergies is before integration costs, which are expected to range between $2 million to $3 million per quarter through 2015, the statement adds.

The annualized EDITDAC acquired (2015 expected) – which excludes expected integration costs through 2015 – is $45.4 million, while the EPITDAC multiple to acquire is 9.3X and the equivalent multiple assuming 17% tax rate is 8.2X.

“Gallagher expects to finance the transaction using mostly additional long-term borrowings and its line of credit. This transaction is expected to result in earnings accretion of $0.07 per share in 2015, and should also generate another $0.03 cents per share of earnings from our ability to use additional tax credits.”

Noraxis – a subsidiary of Roins Financial Services Limited, which also owns the RSA Canada group of companies – generated almost $125 million in revenue in 2013, has more than 650 employees and operates out of 23 offices across Alberta, Manitoba, New Brunswick, Nova Scotia and Ontario. By province, 2013 Noraxis revenues were approximately $77 million for Ontario; $22 million for Alberta; $9 million for Nova Scotia; $4million for New Brunswick; and $13 million for Manitoba.

RSA Canada notes in a statement that after minorities, and including estimated excess working capital, RSA is expected to receive cash consideration of $441 million as a result of the sale.

“As the majority shareholder in Noraxis Capital Corporation, an independently operated network of insurance brokers, we believe we are extracting significant value on our investment,” Rowan Saunders, CEO of RSA Canada, says in the statement. “This move enables us to invest in advancing our strategy and build stronger capabilities and propositions to our brokers and customers.”

RSA Canada first became involved in Noraxis Capital Corporation in 1999 as a means of supporting a strong and growing Canadian broker network, the statement notes. 

“The timing was right to sell our stake,” Saunders adds. “Noraxis was strategically important, but not a core part of our business and our focus remains steadfast in executing our Canadian strategy and providing our customers and brokers with the best service and propositions as possible.”

For Arthur J. Gallagher, revenues for its existing Canadian brokerage operations were approximately $28 million in 2013.

Arthur J. Gallagher notes that benefits of the Noraxis acquisition, among others, are expected to include the following:

• establishing Gallagher as a top-five retail broker in Canada;
• providing a significant Canadian platform for future growth;
• sharing a client focus that is primarily middle-market;
• complementing and expanding specialized niche practice groups and capabilities;
• providing opportunities to establish new managing general agent capabilities;
• providing cross-selling opportunities;
• driving longer-term operational efficiencies through a consolidated platform; and
• providing Gallagher’s existing Canadian employee benefits businesses with a strong growth platform.

“In Noraxis, we have found our ideal Canadian partner and together we now have a solid platform for organic growth and a leadership team that will continue to attract new merger partners,” David Ross, CEO of Arthur J. Gallagher International, notes in the statement.

“By joining with Gallagher, Noraxis will be able to leverage our sales and service capabilities across Canada. In particular, our combined expertise in areas such as energy, construction and mining align well with the growth opportunities in the Canadian market,” Ross says.

“This transaction is great news for all of our staff and our insurance markets,” says Noraxis Group president Ken Keenan. “Our clients can now look forward to accessing Gallagher’s global resources and expertise, whilst continuing to receive the high quality and expert service offered from their local Canadian broker and account team,” Keenan says.

“By adding Canada to our recent expansion in Australia, New Zealand and the U.K., we are now well-positioned in those countries to replicate our successful acquisition strategy of partnering with smaller, family-owned and entrepreneurial agents and brokers,” says J. Patrick Gallagher, Jr., chairman, president and CEO of Arthur J. Gallagher & Co. “In each of the countries, we believe there will continue to be a wave of consolidation opportunities like we are seeing in the United States.”

With regard to the market, information from Arthur J. Gallagher notes that Canada is the tenth largest economy and has the eighth highest per capita income in the world. “Trends suggest that Canadian commercial insurance market will outplace Canadian GDP in growth,” the information adds.

Still with regard to market, the information notes rates are expected to increase due to carrier underwriting performance in 2013 resulting from Cat events; and the acquisition “establishes scale and positions Gallagher as one of the largest national insurance brokers in Canada, a growing economy with a stable political landscape that has been a target expansion territory.”

Noraxis’ commercial, personal and employee benefit operations – which will continue to be managed by Keenan – operate under several different names: Renfrew (mostly in Alberta), Ranger (mostly in Manitoba), BF&G Group (mostly in Nova Scotia and New Brunswick), and CG&B, Stevenson & Hunt, and Atrens Counsel (mostly in Ontario).

• the commercial lines middle-market business currently brokers almost 40,000 policies and is expected to generate $92 million of annualized revenues in 2015. This commercial lines business is well-aligned with Gallagher’s expertise groups with a strong emphasis on several complementary industries, such as mining, energy, real estate, transportation, marine, media and condos. 
• the personal lines business currently brokers more than 60,000 policies and is expected to generate $27 million in annualized reve
  nues in 2015 through middle-market and high-net-worth clients.
• the employee benefits business is expected to generate $19 million in annualized revenues in 2015. The additional scale provides a larger geographic platform upon which Gallagher can expand its employee benefits consulting and brokerage services.

With regard to operations, the Arthur J. Gallagher information notes the following of the acquisition:

• opportunity to realize material savings by centralizing back-office operations and integrating the existing Gallagher Canadian business into Noraxis;
• by creating one operating platform for the combined business, it will operate in a more streamlined and efficient manner and provide a good foundation to build upon; and
• large personal lines business presents a robust opportunity to increase revenue by applying Gallagher’s e-commerce capabilities to increase efficiency and profitability.