Why Morgan Stanley Seeks A Buyer For Hub International

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Morgan Stanley (NYSE:MS) and private equity investment group Apax Partners are reportedly looking to sell the Chicago-based insurance brokerage Hub International in a move which was most likely prompted by the impending implementation of the stringent Volcker Rule. [1] The global investment bank holds a stake in Hub through its private equity arm, Morgan Stanley Principal Investments. Strong earnings growth reported by insurance brokerages in recent quarters makes this the ideal time to pursue a sale before the Volcker Rule clamps down on investments in private equity funds by the country’s biggest banking groups.

It also comes as no surprise that talks about a possible sale of Hub, valued at around $2 billion, has emerged just months after the $2.3-billion sale of insurance brokerage firm USI by Goldman Sachs’ (NYSE:GS) private equity arm GS Capital Partners to Canadian private equity firm Onex. [2]

We maintain a price estimate of $24 for Morgan Stanley’s stock, which is less than 10% ahead of its current market price.

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Hub International is ranked among the world’s 10 largest insurance brokers and has a notable presence across the U.S. and Canada with 6,000 employees in 300 branches. [3] The company also has plans to expand in Latin America with established offices in Brazil and Puerto Rico. It has a history of growing rapidly since it was formed by the merger of various Canadian insurance brokerages in 1998, with the company making no less than 300 acquisitions over the last 15 years.

Listed at both the Toronto and New York stock exchanges, Hub was taken private by Morgan Stanley Principal Investments and Apax Partners in a $1.8-billion deal in 2007. Not a very great time for acquisitions, as the economy crashed the very next year and insurance brokerages kept reporting in the red until as recently as late 2011. That’s when fee hikes helped turnaround these businesses making them profitable acquisition targets. Talks of Hub’s sale is no doubt aimed at riding this positive wave.

Morgan Stanley has two clear advantages for initiating the sale of Hub. Firstly, it be one more step towards complying with the stringent Volcker Rule which is expected to be signed into law in the near future. And secondly, the sale would help it raise its capital levels even as the world’s biggest banks shore up capital to meet mandatory capital requirements laid out under Basel III norms. And if the bank makes some profit along the way, there really isn’t anything wrong with the deal.

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Notes:
  1. Exclusive: Apax, Morgan Stanley look to sell Hub – sources, Reuters, Apr 11 2013 []
  2. Onex to buy insurance brokerage from Goldman fund for $2.3 billion, Reuters, Nov 26 2012 []
  3. Fast Facts about HUB, Hub Website []