Acquisitive Australian intermediary PSC Insurance Group is to pay a higher than expected “earn-out” tranche to the management and staff of London market broker Paragon following a strong 2019 performance by the executive liability specialist.

Paragon and PSC

The Australian-listed broking house announced last year it would pay £42mn for Paragon when the deal was announced – based on a 10x multiple of the Lloyd’s broker’s FY18 Ebitda of £4.2mn.

However, after a strong 2019, PSC said today it will pay an additional tranche of £45mn – effectively double the initial consideration – based on a pre-agreed formula of Paragon’s 2019 EBITDA. This includes £3.5mn of a £7mn deferred consideration.

In a 29 May statement with the ASX, PSC said: “We are pleased to confirm that Paragon achieved revenue growth of 27% for the period”.

PSC continued: “As previously advised, this growth is a product of new client acquisition, improving rates in Paragon’s key professional and financial lines specialties and the strength of the underlying client base, which has a large portion of significant players in the technology sector”.

The latest payment will be divided between £24.17mn cash and £20.67mn in the ASX-listed PSC shares, issued at A$2.50.

This takes total consideration paid – or due to be – to £83.2mn. In theory an additional tranche could be paid if 2020 EBITDA exceeds 2019. However, in its statement today, PSC implied this may be unlikely following last year’s outperformance.

“We expect growth to moderate for this calendar year,” explained the Paragon owner.

2019/2020 UK broker acquisitions

But the Australian firm continued: “We are confident that the business will continue to achieve strong growth over the medium term, reflecting the skills in the business, its credibility in the London underwriting markets and US broker market, the classes of insurance they specialise in and the quality of the business leadership”.

PSC concluded: “The integration is complete and has been a success from both a cultural, commercial and procedural point of view”.

In January, PSC told investors that it expected to pay a significant additional component, saying that it estimated Paragon’s 2019 Ebitda to be at least £7mn (vs £4.2mn in 2018).

Founded in 1996 by co-CEOs Tara Falk and James Kalbassi, Paragon has more than 90 staff and focusses on professional and financial lines, including professional liability, D&O, cyber, casualty, healthcare and M&A.

Falk and Kalbassi along with a number of senior team leaders and chairman Chris London were the largest shareholders. There were no outside shareholders.

Paragon and its owners were advised by the insurance specialist boutique, West Hill Corporate Finance Ltd.

To fund the initial consideration for the acquisition, PSC – which separately owns London intermediaries Alsford Page & Gems and Carroll & Partners – completed an institutional share placement of 13,461,538 additional shares at a price of $2.60 per share from its existing placement capacity and expanded its pre-existing debt facilities.

Paragon was one of a number of London market brokers to sell in 2019 amidst strong investor interest and high sale multiples. High profile transactions included the completion of MMC’s £4.3bn acquisition of JLT, BMS’ £500mn sale to British Columbia Investment Management Corporation and Preservation Capital Partners and Gallagher’s ~£200mn consolidation of reinsurance specialist Capsicum Re.

However, uncertainty relating to Covid-19 led to WTW recently postponing its planned sale of Miller and the received wisdom is that 2020-21 intermediary sale valuations are likely to be lower than the high watermarks achieved in 2018-19.

The Insurer comment:

An example of an uncapped earn-out working well for the drivers of a business. £83.2mn is a handsome price for Paragon and its former owner-managers.

But is the Ebitda multiple really 10x? This depends on what costs are stripped out and how EBITDA is defined of course – we expect in reality it may lie closer to the 15-16x range in practice. 

If so, Paragon’s timing was immaculate…