Chicago-based brokerage giant Hub International Ltd. announced completion of its previously announced acquisition of Talbot Financial Corp., a $100 million revenue insurance brokerage based in Albuquerque, New Mexico. The purchase for cash and stock fulfills an important component of Hub’s expansion strategy by expanding the company’s U.S. footprint across several states in the Southwest and West.
“The Talbot acquisition is a major step forward for Hub, increasing our revenue base by roughly one third and adding a highly talented and disciplined team of professionals to our organization,” said Martin P. Hughes, Hub’s chairman and chief executive officer.
The acquisition from Safeco Corporation was implemented via Hub International’s purchase of a 70% interest in Satellite Acquisition Corporation, a corporation formed by Randy Talbot and senior management at Talbot. Proceeds of the investment were used to purchase Talbot and all of its subsidiaries from Safeco for $90 million in cash. Hub will purchase the remaining 30% interest from Talbot management over the next three years, with the right to use a combination of both restricted and unrestricted shares of Hub common stock. All earnings from Talbot will accrue to Hub as of the date of closing.
Hub International employs a combination of cash and restricted stock in many acquisitions, with a goal of increasing the long-term alignment of management interests with the interests of all shareholders.
“Talbot’s management team, headed by David Weymouth, CEO and Roy Taylor, President, has worked within a public company environment as a part of the Safeco organization and they understand the mandate to build value for shareholders,” Hughes noted. “We know they will be an important driver of our revenue and earnings growth over the long term.”
During the three years ending December 31, 2006, Hub’s purchase of Talbot management’s 30% interest in Satellite Acquisition Corporation will be recorded as compensation expense, leading to some reduction in reported earnings. Based on Talbot’s 2003 earnings, it is expected that the net expense for non-cash stock based compensation will be approximately $16 million in 2004, $8 million in 2005 and $2 million in 2006. If Talbot management exceeds specific performance goals, the total compensation impact would increase by $2.10 for each additional dollar of EBITA (earnings before interest, taxes and amortization) that Talbot generates.
“Although we expect this charge to have a negative impact on reported GAAP earnings in the near-term, the long-term benefits of this acquisition should reward shareholders,” Hughes said.
Hughes added that Talbot’s financial results through June 30, balance sheet impact of the acquisition and other figures will be discussed in greater detail on Hub’s next quarterly earnings conference call. In addition, the company will update its earnings guidance to include the impact of the Talbot acquisition at that time.
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