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Heath Lambert considers future with Hawkpoint move

The independent UK broker Heath Lambert Group plc has appointed corporate financiers Hawkpoint Partners to advise on options which could involve a refinancing to pay down debt and raise capital or a complete sale, The Insurance Insider can reveal.

The move comes at a time when the UK broking sector is receiving interest from consolidating firms, insurers and private equity investors.

But potential bidders are having to mull the possibility of further defections from its high margin facilities/special risks division.

This summer, the divisional head Hugh Champion became the latest senior executive to leave the firm and he is set to join the London market broker RFIB.

And there are fears that a number of producers from the unit are poised to rejoin Champion in a move which could have an impact on Heath’s 2008 figures if the business also follows.

The division specialises in the creation of underwriting facilities for accounts such as kidnap & ransom, fine art, medical malpractice, bloodstock and personal accident.

The firm’s chief executive Adrian Colosso, however, points out staff movements are common within the sector and stresses that the firm has also attracted key figures from rivals this year.

Colosso continued by saying the firm is not up for sale, despite the appointment of Hawkpoint. “We don’t deny we are looking at our financing options for the long term – we want to grow and expand our business. But the speculation about us being for sale persists and this coupled with the stories of people leaving the business is quite tiresome and unsettling for our clients, partners and staff”, he told The Insurance Insider. “We have a large number of options available to us and we are looking for the route that will ensure we can build on our successful business model,” he continued.

In the wake of an aborted £200mn+ IPO in 2002, and creaking with debt, Colosso took over the Heath Lambert reins in 2004, and has been widely credited with restoring the group’s financial health. In a bid to cut costs and pay down borrowings, under-performing and overseas divisions have been sold-off, while a financial restructuring and settlement with the UK’s Pension Protection Fund (PPF) enabled the group to unshackle itself from its pension liabilities and undertake a debt-for-equity swap with its bankers.

As a consequence, the firm is now 60 percent owned by banks, led by Royal Bank of Scotland and Credit Suisse, while management owns 30 percent. The remaining ten percent is likely to be taken up by the PPF when it completes its assessment of the pension liabilities.

Shorn of its overseas arms, Heath Lambert is now primarily a UK commercial broker, together with various specialty units, and small wholesale and benefits operations. Retail is thought to be around 85 percent of the group’s revenues and the group has focused on building its regional presence with some success.

However, the group would still like to reduce its debt levels further. It carries around £25mn of senior debt, with £10mn due to be paid at the end of this year and the remainder, 2008, in addition to its subordinated debt.

But underpinning the transformation has also been a change in the group’s mindset. In a similar approach to the Joe Plumeri revolution that occurred in Willis, a culture of fierce cost efficiency has taken root.

This single-minded approach was epitomised in its 2006 results which, claim the broker, saw its earnings before interest and debt repayments climb 84 percent to £17.5mn on operating revenue of £121mn. The group is thought to be projecting a similar level of profits for 2007, albeit on slightly reduced income.

Senior departures

The year, however, has also been characterised by the departure of a number of senior individuals. In addition to Champion, managing directors Tom Ernoult, who headed the firm’s UK national operations, and Mark Hardinge, the head of its Financial Institutions and Professional Risks divisions, have left.

Other significant departures include Graham Lawrenson, who took his wholesale team to Thompson Heath & Bond, while Steve Redgwell, head of the group’s UK broking, has joined rival Aon.

The appointment of Hawkpoint also comes a year after Jardine Lloyd Thompson ’s (JLT)takeover talks ended in acrimonious fashion. The quoted broker was initially thought to be offering around £125mn although The Insurance Insider understands this was subject to haggling because of fears over Heath’s credit write-backs (the company says they have been subsequently approved by the Financial Services Authority).

As a consequence, JLT is unlikely to be at the vanguard of potential buyers despite the support of insurance analysts who felt the potential for cost savings justified the acquisition risk. Nevertheless, it is likely to maintain a watching brief.

One firm which might consider a bid is AXA, the insurance giant that has been busy acquiring UK distribution channels. In less than a year, the insurer has bought Smart & Cook, Layton Blackham and Stuart Alexander.

But it is the UK consolidator Towergate Partnership that is understood to be leading the short-list compiled by Hawkpoint. Peter Cullum’s fast-expanding intermediary is familiar with Heath’s following talks earlier this year and, as it mulls the prospect of a future IPO, needs to maintain its strong growth rate. In addition, brokers such as Willis Group and Gallaghers have also been linked to the firm – the latter is believed to be interested in building a retail platform.

Valuations for UK brokers have climbed in the past year as private equity investors have competed with consolidating brokers and acquisitive insurers keen to control their distribution at a time when rates are falling.

But against this are the recent staff losses, while the prospect of declining rates is beginning to weigh more heavily on broker valuations. On 1 August, for instance, JLT’s shares fell almost ten percent as investors reacted badly to its tough trading outlook despite credible interim results.

Colosso, however, says that despite the appointment of Hawkpoint it is very much business as usual: “We take it as a compliment that we are so highly regarded and that our proposition is so attractive to the outside world. But we would like to reiterate that we remain clearly focused on doing what we do best – delivering high quality service and solutions to our clients and ensuring that Heath Lambert stays at the top of its game”.

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