Onex Corp., Canada’s largest buyout firm, agreed to buy York Risk Services Group Inc. from ABRY Partners LLC in a deal valued at $1.33 billion, boosting its holdings in the insurance business.
York Risk provides risk management, insurance claims, and managed care services. The purchase of the Parsippany, New Jersey-based company is expected to be completed by the end of September, Onex said in a statement today.
York Risk has “unbelievably strong organic growth prospects” and a great deal of mergers and acquisitions opportunity, Robert Le Blanc, a senior managing director at Onex, said in a phone interview.
He said York Risk’s greatest asset is its management team led by Chief Executive Officer Richard Taketa.
“I’m confident they’re going to execute on the strategy,” Le Blanc said.
Private-equity firms such as Onex, Hellman & Friedman LLC, KKR & Co. and CVC Capital Partners Ltd. have been expanding in insurance services to benefit from businesses with steady cash flow and low capital expenditure.
Onex struck a deal in 2012 to buy USI Insurance Services LLC from a fund run by Goldman Sachs Group Inc. in a deal valued at $2.3 billion. USI this year bought about 40 insurance brokerage and consulting offices from San Francisco-based Wells Fargo & Co., the world’s most valuable bank.
Le Blanc said there were plenty of opportunities for York Risk to do “tuck-in” acquisitions as well.
“This is an area -- insurance generally and insurance services -- where we will continue to be active,” said Le Blanc. “Our activity in this sector for the last five or six years I think is going to continue to help us be successful in that area.”
York Risk is the first major acquisition for Onex in 2014, according to data compiled by Bloomberg. Gerry Schwartz, chief executive officer of Toronto-based Onex, said in June valuations were high, making good acquisitions scarce.
“I wouldn’t say we bought this business cheaply,” Le Blanc said of York Risk. “We paid a full and fair price. But we think that it’s going to be a value creator for Onex. We really like what we see.”
Onex has been taking advantage of the rise in asset prices by divesting $6.9 billion in assets including the sale of Gates Corp. to Blackstone Group LP for $5.4 billion in April, which it sold with its partner Canada Pension Plan Investment Board.
Onex sold insurance underwriter Warranty Group Inc., earlier this year for $1.5 billion to TPG Capital, more than tripling its money.
The York Risk acquisition will put a dent in Onex’s growing cash piles, said Paul Holden, a Toronto-based analyst with CIBC World Markets Inc. But it may not be enough to alleviate concerns about a drought of acquisitions.
“Several acquisitions are likely required to alleviate the market’s concerns regarding the ability to find attractive opportunities and this is a first step in that direction,” he said in a note to clients today.
Onex still has plenty of “dry powder” for more acquisitions with an estimated cash balance of $2.4 billion left after the York Risk acquisition, said Scott Chan, a Toronto-based analyst at Canaccord Genuity Group Inc., in a note to clients.
He said other potential uses of the cash would include increasing its commitment to its Onex Partners IV fund or Onex’s credit products, share buybacks, private equity co-investments, or increasing its dividend.
Onex is scheduled to report second-quarter results on Aug. 13.
Onex shares fell a percentage point at 12:55 p.m. in Toronto. Onex’s shares have gained 9 percent since the start of the year, outpacing other publicly-traded private equity funds, including KKR and Blackstone, whose shares have risen 2.75 percent and 7 percent respectively over the same period.
Onex’s share price performance this year has been a bit of a surprise given the lack of acquisitions, said Jennifer Radman, a fund manager at Caldwell Investment Management in Toronto, which oversees about C$1 billion and holds Onex stock. But she said she likes its cautious approach and that they use their own money as well in their investments.
“For Onex, in particular, they’re very selective in what they do so if they do five deals a year that’s a big year for them,” she said in an interview. “I would have thought that stock if anything would have had a bit more pressure on it.”
The equity investment in York Risk of approximately $560 million will be made by Onex Partners III, certain limited partners as co-investors, including Onex, and York’s management team, Onex said. It will also mark the last new investment in the Onex Partners III fund, Le Blanc said.
ABRY Partners acquired York Risk in 2010, according to data compiled by Bloomberg.
Morgan Stanley advised York Risk on its sale, Le Blanc said. Bank of America Corp. and Morgan Stanley led the bank and bond financing on the deal, he said.