Investment firm KKR will buy a “majority interest” in TPA Sedgwick for $2.4 billion in a deal announced officially minutes ago.
The transaction is the latest of several high-multiple deals for workers’ comp assets, second only in size to Apax’s total cost for the combined OneCall/Align transactions. Estimates of the valuation are in the 11-12x on a trailing basis or perhaps around 10x of forecast earnings. However, what isn’t known is exactly how much of Sedgwick KKR bought. It is likely management owns a piece of the company; I’d be somewhat surprised if the sellers – Hellman & Friedman and Stone Point – retain any significant stake. I would speculate that the total valuation – after accounting for minority ownership – is between 10x – 11x of forecast earnings.
(I need to revise my expectations, as I’d forecast a sale price of “as much as $2.4 billion.”
Regardless, a double-digit valuation for a TPA is a pretty rare occurrence.
So, what does this mean?
First, there’s been no decrease in deal flow in the work comp space, and there are at least two others in process. At some point this will slow down/end, perhaps because there’s nothing left to buy and/or prices get so high that even the most enthusiastic will stop bidding.
Second, investors that have been bidding on assets are now selling into the market. This tells me they see the opportunity as pretty darn attractive, making it hard to hold on to investments when they can sell them for double digit multiples. Arguing with myself, perhaps this implies the deals will continue as today’s owners find the returns just too good to pass up.
Third, I’d expect current management will stay at Sedgwick. Dave North et al have made the current investors happy indeed (doubling the value in four years), and KKR will want to continue that trajectory. I don’t see North as ready to ride into the sunset just yet.
Fourth, don’t look for any combination of Sedgwick and KKR’s other recent P&C acquisition, Mitchell International. Too much channel conflict, very different companies, little overlap, and synergies would be relatively small.
Fifth, times are relatively good for TPAs these days; that said the competition should see this as a loud and sustained wakeup call. New owners will demand even more top-line and bottom-line growth from Sedgwick, so expect they’ll be as competitive as ever – if not more so.
