Wednesday, May 09, 2007

Marsh & McLennan (NYSE:MMC): LBO candidate?

- Deutsche Bank has some interesting comments on Marsh & McLennan (NYSE:MMC) following Q1 results reported yesterday saying they have believed for a while that the co would be attractive to a financial buyer. In the past few months, two brokers, USI and Hub, were acquired through a leveraged buy out (LBO). In the past, Willis Group was taken over by KKR in a very successful transaction. So there are plenty of precedents for LBOs in the insurance brokerage space and today it again seems to be an area of interest to the private equity community.

The company owns the premier and largest franchises in its chosen segments, with Marsh and Guy Carpenter in insurance and reinsurance brokerage, Mercer Consulting in employee benefits, and Kroll in Risk Consulting. Each of these businesses are strong cash flow generators and do not require much capital to operate. In addition, they can be run separately - giving tremendous flexibility in terms of asset sales.

Senior management would do well in a takeout. The top five senior officers would receive a total of $74 million for involuntary termination or termination for good reason upon change in control, in cash and unvested stock awards.

If the private equity firm invested $8 billion in Marsh, the returns per year at 15% are $1.2 billion. Private equity investors usually target returns of 20% or above but for large multi-billion dollar transactions, they are willing to accept a lower hurdle rate ranging from 15% to 17%. That would imply a $40 stock price. Maintains a Buy rating on MMC.

Notablecalls: Interesting comments by DB's Alain Karaoglan. Yet, people close to the co have repeatedly said there is no deal in works. Also, the chart does not indicate the stock is ready to bolt upward from here. It looks more like the buyers from 3 weeks back are closing their positions as talk of the imminent LBO is fading.

I would not be surprised to see a fade in MMC stock today if it gaps up more than say $0.50 on open.

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