The $30bn merger of mega brokers Aon and Willis Towers Watson (WTW) looks certain to be delayed, and potentially scuppered, by ongoing regulatory concerns over competition.
Aon now faces a possibly protracted legal battle with US regulators and a renewed probe in Singapore. However, the firm has reached an agreement with competition regulators in South Africa.
The merger of Aon and WTW, first agreed more than a year ago, was due to complete by the end of this month. The brokers have reportedly agreed a deal with European competition regulators that will allow the deal to proceed. This involves the two firms divesting significant reinsurance, corporate broking and employee benefits assets to allay concerns.
However, in a surprise move last month, the US Department of Justice (DOJ) filed a lawsuit aimed at blocking the merger, which the DOJ believes would reduce competition and could lead to higher prices.
Aon and the DOJ are now battling over the date for the court case. According to media reports, Aon has filed a request asking the court to set a date of 23 August, or soon after. The broker is keen to obtain a court ruling on the merger before 9 September, the deadline for completion set in the original merger agreement with WTW. The DOJ has reportedly proposed that the trial commence sometime after 28 February next year, some six months after the completion deadline. Abandoning the deal could see Aon pay WTW $1bn in compensation.
Analysts at Keefe, Bruyette & Woods (KBW) said the DOJ action could lead to more divestitures or the merger deal unravelling. “Litigation seems very likely to prolong the deal’s uncertainty, which would probably lead both employees and clients to seek stability elsewhere… We cannot project any litigation’s likely success, but we think that additional divestitures are more likely than Aon abandoning the deal and paying WTW the $1bn break-up fee,” KBW said.
Wells Fargo gave Aon a 50/50 chance of winning against the DOJ. If the lawsuit does go to trial, it will likely be in the autumn and could last two to four weeks, with a judge’s decision following a few weeks later, one of its analysts predicted. Wells Fargo also suggested that rival US broker A J Gallagher could benefit from further divestments, having already agreed to acquire a substantial chunk of WTW.
The deal faces competition challenges in other jurisdictions. This week, the Competition and Consumer Commission of Singapore (CCCS) announced it would conduct a further review of the Aon WTW tie-up. Following a public consultation and submissions by Aon, the CCCS identified areas for further review, in particular around executive compensation and related consulting services. It said there are concerns that the merged entity will become the largest provider of executive compensation and related consulting services in Singapore, and that there are limited alternative providers able to compete effectively in the country.
Last week, the Competition Commission of South Africa (CCSA) said it would approve the merger, but with certain conditions.
Its investigation found that the proposed merger is likely to result in a “substantial lessening and/or prevention of competition” in the market for reinsurance broking and corporate short-term insurance broking in South Africa. The commission noted that there are only three large brokers with a global presence and the capacity to cater for larger South African businesses’ complex risk service requirements. Post-merger, this would be reduced to two.
Subsequently, the CCSA agreed with Aon that it would divest WTW’s global reinsurance broking units dedicated to treaty and facultative reinsurance services. It also set conditions regarding WTW’s global commercial risk brokerage businesses in aerospace, European cyber and its commercial risk broking business in Germany, France, the Netherlands and Spain. In South Africa, the two brokers have offered to divest the entire WTW short-term insurance broking services to the same third party acquiring the divested reinsurance business.
“The commission is agreeable to the remedy proposal as it completely removes the overlaps between activities of the merging parties in relation to the provision of reinsurance broking and short-term insurance broking services in South Africa, and is likely to create a credible third competitor, thus restoring competition in both markets,” the CCSA said.
In May, Aon reached a deal to sell a number of WTW assets to A J Gallagher for $3.57bn. The deal included WTW’s global reinsurance arm, corporate risk and broking operations in Europe, and certain employee benefits businesses. The deal was intended to allay the concerns of competition regulators, in particular those in the European Union. Aon also announced the sale of some assets to private equity firm Aquiline Capital Partners and tech firm Alight for $1.4bn in a bid to get US approval for the deal.
In April, media reports emerged that Aon had reached a deal with the European Commission that would clear the merger, after Aon offered to sell assets to address competition concerns.