Canadian private equity firm Onex Corp OCX.TO will buy U.S.-based insurance brokerage USI from Goldman Sachs Group Inc's (GS.N) private equity fund for $2.3 billion to expand its financial services footprint.
Insurance brokers have seen strong revenue growth over the past few quarters as insurers have raised prices on their offerings to offset big catastrophe losses last year.
"The U.S. property and casualty insurance industry seems a lot more attractive now because the business could generate good cash flow and that is important for private equity players," analyst Scott Chan of Canaccord Genuity said, adding that the deal is a "positive".
USI, founded in 1994 and taken private in 2007, offers property, casualty, employee benefit and retirement consulting services. The company says it is the ninth largest insurance broker in the United States. It bought TD Insurance Inc, the US insurance unit of Toronto-Dominion Bank (TD.TO) in September.
Onex, with about $14 billion of assets under management, has mostly invested in industrial and healthcare sectors. Its exposure to financial services is through its investment in the Warranty Group. The Chicago-based underwriter also provides credit insurance and other specialty insurance products.
"Given the current competitive deal environment, we are pleased with the announcement which represents the third significant deal Onex has announced since early September after a period of relative quiet," Phil Hardie of Scotiabank said in a note to clients.
"Cumulatively, we estimate the last three deals to contribute 6.2 percent of Onex's enterprise NAV."
The USI acquisition is the largest of the eight deals Onex signed this year, according to Thomson Reuters data.
Onex, whose businesses generate annual revenue of $34 billion, said in September it would buy German plastics machinery maker KraussMaffei AG and packaging graphics services provider SGS International Inc.
"We expect Onex to continue to pursue acquisitions as it looks to deploy high levels of uncalled third-party capital commitments and its own excess cash," Scotiabank's Hardie said.
Onex Partners III, Onex's $4.7 billion private equity fund, will make an equity investment of about $700 million. Onex is a 25 percent limited partner in Onex Partners III. Onex is a co-investor in the transaction, which is expected to close by the end of the year.
USI said its employees, who invested alongside the Goldman Sachs private equity fund GS Capital Partners to take it private, will remain investors in the company.
"We would not be surprised if USI continues to be an industry consolidator under Onex's ownership," CIBC World Markets analyst Paul Holden said in a note to clients.
GS Capital Partners and Onex own aircraft manufacturer Hawker Beechcraft Inc HKBCH.UL, which last month unveiled a plan to exit bankruptcy.
Onex was advised by Morgan Stanley for the USI deal, while GS Capital Partners was advised by Goldman, Sachs & Co and RBC Capital Markets LLC.
Shares of Onex fell 2 percent to C$39.77 on the Toronto Stock Exchange on Monday. ($1 = 0.7717 euros)
(This story has been corrected to change name to CIBC World Markets from CIBC Capital Markets in paragraph 13)
(Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Sriraj Kalluvila)