4. Willis Towers Watson Plc (NASDAQ:WLTW)
Starboard Value’s Stake Value: $505,716,000
Percentage of Starboard Value’s 13F Portfolio: 6.7%
Number of Hedge Fund Holders: 49
Willis Towers Watson Plc (NASDAQ:WLTW) operates as an advisory, broking, and solutions company worldwide. At the end of Q1 2022, 49 hedge funds held stakes in Willis Towers Watson Plc (NASDAQ:WLTW) worth $2.18 billion. This is compared to 66 positions in Q4 2021 with stakes worth $4.0 billion.
On April 28, Willis Towers Watson Plc (NASDAQ:WLTW) posted earnings for the fiscal first quarter of 2022. The company reported earnings per share of $2.66, beating estimates by $0.16. Moreover, the company’s revenues were valued at $2.16 billion, down 16.60% year over year, missing expectations by $74.21 million.
As of March 31, Starboard Value owns 2.14 million shares of Willis Towers Watson Plc (NASDAQ:WLTW) which brings its stakes in the company to $505.71 million. The investment covers 6.7% of Starboard Value’s 13F portfolio and ranks the stock fourth among the top 5 holdings of the hedge fund.
Here is what Artisan Partners had to say about Willis Towers Watson Plc (NASDAQ:WLTW) in its ‘Artisan International Value Fund’ fourth quarter 2021 investor letter:
“During the quarter, we made meaningful new investments in two UK domiciled companies, (one of which is) Willis Towers Watson (WTW). Long-term investors will recognize Willis Towers Watson since it was in the portfolio from 2018 to early 2021. We exited that investment after WTW agreed to merge with Aon. Unfortunately for WTW and Aon, that proposed merger was rejected by the US Department of Justice in July 2021. In fact, there is significant market power in this industry, which is what makes it a great business. That market power is exerted not with the insurance brokers’ corporate customers, but with their suppliers (insurance underwriters). We were surprised at Aon’s attempted merger, and our concerns regarding antitrust approval encouraged us to sell.
WTW operates two businesses: insurance brokerage and HR consulting. Both are market-leading with attractive financial profiles and mostly recurring revenue streams. Despite these strengths, WTW operates with lower margins versus peers. The margin opportunity is most pronounced in the insurance brokerage business. Management has slowly increased the insurance brokerage margin over time, but a large gap remains with best-in-class peers like Marsh & McLennan and AJ Gallagher. Management presented a plan to increase the insurance brokerage business’s margins 5% by year-end 2024. This plan follows the outline other insurance brokers have previously used to increase their margins—giving us confidence the targets are achievable.
The merger’s demise brought a new and experienced CEO, a new CFO and a refreshed shareholder-aligned board of directors. In addition, the merger’s cancellation transformed the company’s financial
position. As part of the agreement, Aon paid WTW a $1 billion “break fee.” WTW also sold a re-insurance brokerage business for $3.25 billion along with the potential to earn $750 million through an earnout agreement. With the proceeds, WTW expects to repurchase approximately $4 billion of stock between the second half of 2021 and the end of 2022. With existing cash on hand and cash generation over the next three years, we estimate the company can return another $6 billion to shareholders through dividends and share repurchases representing over 20% of today’s market capitalization. We forecast earnings of approximately $20 per share in 2024—a price to earnings (P/E) ratio of 11.5X. We believe that valuation significantly undervalues this high-quality business.”
