Shares in Jelf Group (LSE: JLF) soared by more than 20% today, as the insurance broker announced that it was in talks with Marsh over a possible cash bid. Jelf’s management has been seriously looking for a buyer since the company implemented a new incentive scheme for its management to find a potential bidder in December 2014.
“Discussions, which are ongoing, are at an early stage and there can be no certainty that any offer will ultimately be made for Jelf or as to the terms of any such offer”, the company said in today’s announcement.
Jelf provides services to both businesses and individuals in three main segments: insurance, employee benefits and financial planning. Insurance broking is its largest segment, accounting for just over two-thirds of Jelf’s total revenues.
Marsh, which is a subsidiary of the second largest insurance broker in the world, is interested in buying Jelf because it is looking to expand its reach across the small and medium-sized business sector in the UK. Earlier this month, Marsh announced that it had completed its acquisition of SME Insurance Services, another independent broker in the UK that serves small and medium-sized businesses.
Jelf has itself been active in acquiring smaller companies, having completed seven acquisitions since 2013. Making acquisitions has been the company’s main engine for growth and Jelf has had a strong track record of integrating regional businesses. Acquisitions enable Jelf to grow its client base more quickly, become more efficient, and helps it to attract new business.
The insurance broker is also doing well in growing organically, with organic revenue growth of 4.2% in the first half of its 2014/5 financial year. It has achieved this with strong customer retention, success with gaining new customers and higher levels of insurance cover being taken out. This shows that even if Marsh does not though with the acquisitions, Jelf is a sustainable business in its own right. In addition, a rival bid could develop, as consolidation activity picks up in the insurance sector.
Valuations for Jelf’s shares are already quite pricey, as shares in the company have already risen by 97% over the past year. Its forward P/E ratio is currently 18.4, despite analysts expecting underlying EPS will jump 90% higher this year, to 11.4 pence. For 2015/6, analysts expect underlying EPS growth will slow to just 5%, which means its forward P/E falls only slightly, to 17.5. With such a pricey forward earnings valuation, Marsh is unlikely to reward Jelf’s shareholders with a substantial premium on today’s share price.