Splitting the difference

What will the Gissings split mean for their clients in the long term? John Greenwood looks at plans for an amicable divorce

The deal that will split Gissings in two is yet another indicator of the appetite amongst investors for corporate intermediaries. What it means for Gissings clients in the long term remains to be seen.

Coming a couple of months after Axa-owned Thinc’s acquisition of PIFC Consulting, the £18m management buy out of Gissings Advisory Services (GAS) backed by private equity group Dunedin is not likely to be the last such deal for some time. The deal, led by Andy Kilbey, who becomes managing director of the new company, together with Jamie Barnes, Iain Laws and David Brooks, sees principal shareholders Sean Breslin and Andrew Dawson give up around a third of the Gissings business to the new operation.

The good news for shareholders in other businesses in the employee benefits space is the fact that Dunedin is in the market for more acquisitions, with £40m cash plus gearing to splash on businesses to bolt on to GAS.

Giles Derry, a director of Dunedin and now a board member of GAS, says the private equity house has around 14 other companies in its sights. Its future targets are likely to be consultancies operating in the flexible benefits and wellness space. “We are targeting those companies involved in the provision of employee-centric services such as wellness and occupational health and less so those offering pensions,” says Derry.

GCS has legally been a separate business from GAS for three and a half years, but two companies owned by the same shareholders will operate in a different fashion to two independent entities, which is why some are wondering where the deal will leave Gissings clients.

Under the contract that governs the relationship between the two companies, who share many clients under the Gissings name, both parties have a non-competition obligation that precludes them from taking the other’s business. However, after that agreement has come to an end, in 12 months time, each will be entitled to target their former colleagues’ business at will.

GAS will maintain use of the Gissings name for between six and 12 months, after which the new entity will operate under a new title, which is yet to be determined. The split is understood to be an amicable one, but GAS will move out of the company’s Finsbury Circus premises in October 2008.

Some in the industry warn the cordiality of the relationship may not last. With private equity backers sitting on the board, doubtless pressure to maximise profits will be intensified, and as Derry has already identified cross-selling as one way to boost business, it seems likely that Gissings clients will be in for some interesting conversations when the agreement comes to an end.

Derry’s plan is to expand the GAS business in three ways – acquisition, organic growth and cross-sales. “The most profitable customers are those to whom we sell three or four services and the least profitable are those only taking one service,” says Derry.

Kilbey says: “At the moment we will refer pensions through to GCS and I have no plans to change that. If through acquisition we acquire a company which does pensions then that will change, but that is not our core market. Our core areas are flex benefits and healthcare and risk books.”

With Dunedin looking to increase its cross-sales on its group risk business, it says it could acquire a firm with a pensions arm, although today this is not a priority.

A statement from Dunedin also points to the more general economies of scale that can be made from bringing together employee benefits consultancies and IFAs. It points out there are more than 100 corporate intermediaries in the PMI market alone, and says consolidation is likely to realise cost synergies and opportunities for revenue synergies between client bases.

Dunedin has a track record in bringing together financial services companies in this way. It has previously backed Practice Plan, Davenham, Zenith and Home & Legacy, the high net worth GI broker, whose profits it saw increase from £2.6m to £5.5m in the three years up to June 2006 that it owned it, before offloading it for an undisclosed fee. Dunedin’s plan for GAS is equally short term, with a sale around three years down the line likely.

Simon Holt, marketing manager at GCS says his side of the business will review its pensions focus at the end of the wind-down agreement. He says: “At the end of that period we will start to look at our strategy for the pensions business and figure out what sort of service we want that to be. If that is beyond our current business we will look at whether we set up partnerships or employ people in these areas.”

At present both GAS and GCS say they want to stick to their patches and will not step on their partner’s toes – thanks no doubt to a strongly worded legal agreement. But as that agreement comes to an end, industry-watchers say we can expect both businesses to fill the gaps in their offerings. The competition for clients could be fierce.