Ahead of the Bell: Willis Group downgraded

An analyst downgraded Willis Group Holdings Ltd. late Monday, citing the British insurance broker's planned acquisition of Hilb Rogal & Hobbs Co.

Citi Investment Research analyst Keith F. Walsh cut his rating to "Hold" from "Buy" and his price target to $36 from $40. The new target implies he expects shares to rise about 16 percent over Monday's $31.18 close.

While the Hilb Rogal & Hobbs would double Willis Group's North American business and likely lead to $140 million in cost savings by 2012, the company paid a steep premium paid and integration risk remains, he said.

"The deal essentially gives us flat margins from now through 2009," Walsh said in a note to clients. "As margins drive insurance broker stocks, (investing in the company) becomes suitable only for investors with a longer-term strategy."

Walsh said the new outlook was based on "persistent" revenue pressure and minimal share repurchasing.

He cut his fiscal 2009 earnings outlook to $3.15 per share from $3.20 per share. Analysts polled by Thomson Financial expect, on average, earnings of $3.20 per share for fiscal 2009.

Shares have dipped about 18 percent so far this year.

A company representative was not immediately available for comment.