Fitch places MMC in rating watch negative
Fitch Ratings has placed the ratings of Marsh & McLennan Companies (MMC) on rating watch negative in the wake of its announcement that it is buying Jardine Lloyd Thompson (JLT).
MMC will acquire JLT for a total cash consideration equates to roughly $5.6 billion in fully diluted equity value, or an estimated enterprise value of $6.4 billion. The transaction will be funded with cash on hand and proceeds from future debt financing. The transaction is expected to close in the spring of 2019.
Fitch said that the rating watch negative reflects the expected increase in near-term debt and related increase to financial leverage as measured by debt to EBITDA, above levels acceptable for the current rating category. Increased debt will also result in lower interest coverage. The rating action also reflects the inherent execution risk and longer-term integration risk associated with a transaction of this size, which is larger than what Fitch perceived to be MMC's acquisition appetite. These risks include uncertainty tied to realising anticipated expense savings and retaining key employee and clients going forward.
The rating watch will be resolved, and Fitch expects to downgrade MMC's ratings by one notch to 'A-' with a negative outlook, upon completion of the transaction-related debt financing. The negative outlook will reflect the longer-term acquisition integration risk as well as the continued near-term elevated debt level and the effect on associated financial ratios.
Fitch estimates that the all-debt funded transaction and relatively high debt utilisation at JLT fosters considerably higher pro-forma financial leverage for the combined entity at roughly 3.0x relative to MMC's current annualised debt to EBITDA of roughly 1.6x at June 30, 2018. However, ultimate long-term capital management plans and tolerance for debt leverage are likely to be at a lower level. A return to debt to EBITDA ratios at consistently near 2.0x would be viewed positively in the rating assessment.
Fitch expects that financial leverage will gradually decrease following the acquisition over the next one to three years from continued EBITDA growth, projected expense savings of $250 million related to the acquisition, and anticipated debt repayment.
The rating agency added that in the long term, MMC's acquisition of JLT should result in positive business and operational synergies. The transaction creates a larger, more diverse entity with complimentary operating franchises in specialty insurance and reinsurance brokerage, and employee benefits consulting services.
