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Hub valued at up to 14x Ebitda

Hub International may be worth more than 14x Ebitda if a report suggesting the US broking giant could carry a hefty $7bn price tag is to be believed.

Last week, Reuters revealed that the broker's majority owner private equity (PE) firm Hellman & Friedman was looking to cash out a portion of its stake in the business.

The report suggested that the sale could value the intermediary at between $6bn and $7bn, which - at the top end - would represent a staggering 14.2x Ebitda multiple, according to numbers collected by Moody's.

It would also represent a high 4.4x multiple when compared to revenues collected in the 12 months leading up to the end of August last year - the latest available data.

For that period, Hub reported revenues of $1.6bn and Ebitda of $494mn. Those metrics have shown impressive growth over the past few years as the expansive broker has picked up smaller rivals and bolstered its own top line in doing so.

Revenues at Hub were $989mn in 2012. That figure grew by 15.9 percent to $1.15bn in 2013, when it was acquired by Hellman & Friedman in a $4.4bn deal.

The agreement valued the business at 3.8x annual revenues or 11.3x the $387mn Ebitda Moody's reported for the broker that year.

Hub revenues and Ebitda

Since then revenues have grown at an average rate of 11.8 percent year-on-year, while Ebitda has climbed at an average rate of 8.5 percent.

But top line growth tailed off in the 12 months to August 2016, when revenues grew by just under 9.0 percent. However, this decline could be attributed to seasonal timing issues.

During that same period, Ebitda growth almost doubled to 13.04 percent, up from 6.59 percent in the prior calendar year.

Hub's Ebitda margin has remained consistently strong, hovering at around 30 percent since achieving its five-year high of 33.8 percent in 2013.

However, the business is highly leveraged, with the debt-to-Ebitda ratio standing at 8.5x, although that is a step down from its 9.4x peak in 2014.

Going into the fourth quarter of last year Hub was carrying $4.21bn of debt, a 7.4 percent increase on December 2015.

Hub financial flexibility

In March this year, Moody's upgraded Hub's rating outlook from negative to stable based on its Ebitda growth, reduced financial leverage and the rating agency's expectation that the broker would continue to shrink leverage in the year ahead.

Moody's praised Hub's "solid market position in North American insurance brokerage, good diversification across products and geographic areas, and consistently strong Ebitda margins".

But it added: "These strengths are tempered by the company's aggressive financial leverage and limited fixed charge coverage."

"We expect that Hub will continue to pursue a combination of organic growth and acquisitions, with the latter giving rise to integration and contingent risks," it said, citing exposure to errors and omissions claims among others.

However, the rating agency also pointed out that Hub had a favourable track record in absorbing small and mid-sized brokers.

The exact size of the stake that has been put up for sale is not known, although Reuters said Hellman & Friedman would retain a controlling interest.

News of the sell-off could end rumours that the PE firm is eyeing an IPO for Hub to capitalise on the soaring valuations paid for intermediaries in recent deals.

Brokers are particularly attractive to PE firms for several reasons, including a relatively low demand for capital, steady revenue flows and good growth potential. Investment bankers have said PE firms have played a major role in driving valuations in the space this year.

Last month Carlyle Group sold its majority interest in Epic Insurance brokers to another PE firm, Oak Hill, in a $997mn deal that is said to have valued the intermediary at as much as 5x annual revenue. Oak Hill cited the company's growth potential as a basis for its value.



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