Covid-19 ‘slowing M&A deals’

The Covid-19 pandemic is slowing transactions that have already been agreed and is likely to put a significant dampener on deal-making this year, according to industry insiders. 

In the London market, a number of merger and acquisition (M&A) transactions are being reviewed by the regulators under change of control or portfolio transfer rules/. Such processes are likely to be more intense or protracted as the parties are asked to factor in the financial and operational impact of Covid-19 on the combined business and their integration plans, according to Katherine Coates, a partner at Clifford Chance.

Some insurers are also understood to be slowing processes on their own initiative to prioritise providing basic services to their customers. This includes the Part VII transfer of part of Legal & General’s business to ReAssure, which has been paused because of uncertainties as to whether it could have an impact on normal services.

Two major deals were announced just ahead of the Covid-19 crisis and are in the process of completion: Aon’s takeover of Willis Towers Watson to create the world’s largest broking house; and French mutual Covéa’s takeover of PartnerRe. Covéa and Aon have both said they are committed to those transactions.

Aon’s takeover of Willis Towers Watson is an all-share deal, valued at $30bn at the time, and the valuations of those companies have moved in lock-step since it was announced, suggesting the market is very strongly of the opinion it will go ahead.

Covéa’s $9bn takeover of PartnerRe, on the other hand, is for cash and was already at a significant premium on the $6.9bn Exor paid for PartnerRe five years ago.

One top M&A banker told Insurance Day the deal was expensive to begin with, but could be considered “crazy” in the present context. The banker added he expects it to go ahead only because Covéa is a mutual and its executive team is seen as being under less pressure to make immediately beneficial M&A deals.

“You don’t want to spend cash when the market has crashed,” the banker said. “Exor will be rubbing its hands to get all that.”

The plunge in valuations caused by Covid-19 makes assessing companies’ true value almost impossible, dealmakers say. Although it may be the case that the crisis pushes some companies to engage in “rescue” transactions, there is little expectation companies will start serious, aggressive M&A processes so soon.

Some expect that once the worst of the crisis is over, the market will see an “upsurge” of M&A as companies begin to understand the impact of the virus on their balance sheets, capital strength and business plans.

“We would expect to see disposals of non-core businesses to strategic buyers, financial buyers and run-off specialists, as well as potentially mergers to achieve better economies of scale and to benefit from hardening of premium rates in some lines,” Coates said. There could also be more tech-focused M&A investment, as Covid-19 underlines the importance of a strong digital capability.