Notes from the Desk: An Update on Willis Towers Watson/Aon
On July 26, Willis Towers Watson (WLTW) and Aon (AON) announced they had abandoned their planned $30 billion merger, which would have created the world's largest insurance broker, rather than go to court to defend against an attempt to block the deal by the United States Department of Justice (DOJ). Now that we, like many arbitrageurs, find ourselves in a deal-break situation, we have several questions to answer in order to determine the most appropriate path forward:
Who was the party that pushed for deal termination – WLTW or AON?
Based on our interpretation of the press release, we believe WLTW felt their business was being hindered by the lengthy duration of the deal and the company did not want to wait any longer. If WLTW’s business had been deteriorating, they likely would have agreed to any extension in the timeline or even a cut in terms.
What is the opportunity now?
WLTW is set to receive a $1 billion termination fee from AON, and the company announced it has already approved a $1 billion increase in its stock buyback program. This shows confidence on the part of WLTW management in the company’s underlying fundamentals, and it may help members of the event-driven community exit their positions. WLTW may now also entertain talks with Arthur J Gallagher (AJG), the buyer of many assets that were set to be divested in the WLTW-AON deal. Furthermore, we are witnessing a disconnect in the post-break spread in WLTW-AON. While our analysis of the fundamentals suggests it should trade around $30, it is currently trading in the upper $50s as of this writing on the day of termination. Thus, the primary opportunities we see at this point are the potential for WLTW to enter talks with AJG and for the break spread to begin trading at more normalized levels.
Why is there a disconnect in the break spread?
The failure of the WLTW-AON transaction is yet another adverse outcome in a series of challenges event-driven investors have faced for the past couple months. WLTW-AON has been one of the most widely held positions in the merger arbitrage and broader event-driven community. It has also been a top position in many portfolios given the high levels of conviction in the deal and the timing of the termination, which likely caught many arbitrageurs by surprise with it coming so early in the legal process against the DOJ. With all that in mind, there seems to be little tolerance for additional portfolio losses within arbitrage portfolios, as we are seeing spread pressure not just in WLTW-AON, but also in several other deals as investors exit their positions en masse.
What are we doing?
Both WLTW and AON are currently in a blackout period ahead of scheduled earnings calls, so while the amount of information we can glean currently is limited, we may get more clarity in a few days. For now, we are looking to increase our exposure to WLTW-AON opportunistically, to take advantage of the post-break spread dislocation. While there is no longer a hard catalyst attached to this situation, we see potential for multiple near-term and medium-term soft catalysts to emerge. We are also monitoring other spreads in our universe, and should any of those reach dislocation levels, we expect to add to those positions as well.
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