THE appointment of Bruce Hemphill, a South African, as CEO-designate of Old Mutual Plc has reignited the question of whether the new captain should bring the London-based company’s headquarters back to its country of birth.
Old Mutual was founded by a Scotsman, John Fairbairn, in the Cape of Good Hope in 1845 and its profits are still largely made in SA. In May 1999, when democratic SA was just five years old and its founding president, Nelson Mandela, stepped down, Old Mutual demutualised. Sanlam had undergone the same process the previous year.
Two months after demutualisation, Old Mutual obtained a primary listing on the London Stock Exchange. It was one of a handful of companies in SA in the late 1990s that sought and got permission to list offshore. These included BHP Billiton, SA Breweries, Anglo American and Dimension Data in 2000.
A range of ideas had been submitted to government, with some arguing that offshore expansion would offer opportunities to raise cheap capital for acquisitions, which would give SA companies the chance to become global players.
But critics, in the case of Old Mutual in particular, argue that no significant value has been added by having a primary listing offshore. They have on many occasions pointed out that despite the insurer’s European base for more than 15 years, the bulk of its profits is still generated in the southern hemisphere.
The Public Investment Corp (PIC), Africa’s largest investment manager, has weighed in on the issue, noting that as an investor it is not in favour of any SA company having its primary listing offshore.
The PIC, under CEO Daniel Matjila, says it is finalising a framework on how it will treat such listings, but has not referred specifically to Old Mutual, in which it has a substantial interest and about 5,48% of the voting rights in the company as of December 2014.
"As a matter of principle, the PIC is not in favour of an offshore primary listing by any of its listed investee companies for a number of reasons," it said in an exclusive statement to the Financial Mail this week. "While the primary argument for an offshore listing has always been access to cheaper sources of capital, as well as the ability for large investors to access the stock, our analysis implies that there are no conclusive arguments in favour of this."
"To the contrary, companies with primary listings offshore experience significant increases in costs as they are benchmarked against offshore counterparts [with higher head office rental costs, staff, as well as nonexecutive board costs, among others]. Furthermore, a primary offshore listing will ultimately impact liquidity and the market capitalisation of the JSE."
The pay of Old Mutual Plc’s directors is denominated in pounds sterling. In the year ended December 2014, the total remuneration of three of Old Mutual’s executive directors amounted to about £8m — or about R144m at the average exchange rate used by the insurer for its financials last year. This excludes the pay of other executive committee members who are also offshore. Compare that with the pay structure of Old Mutual’s rival, Sanlam, which remains headquartered in Bellville, Cape Town: four of its executive directors received a total remuneration of R35,9m in the year ended December 2014.
All in all, Old Mutual’s corporate costs were £55m (R988m); Sanlam says its holding company’s aftertax recurring corporate expenses were R185m.
However, despite the questioning of its reasons to remain primary listed offshore, the company, which is older than Anglo American, remains convinced its headquarters are best placed in London. The view could be motivated by a conviction that the UK business is on course to grow faster in future and therefore the proportion of profits from SA and the rest of Africa will decline in relative terms.
"We believe that given the international nature of Old Mutual and the geographic spread of our businesses, London continues to be the most appropriate location for our headquarters. We have no current plans to relocate our head office to Johannesburg," the company said this week.
"Our management team are entirely focused on delivering our strategy of creating enterprise value by growing in markets of greatest opportunity and where we have a strong competitive positioning. Over the past two years we have made some significant investments to transform the future prospects of the group. We are now focused on operational execution so we can deliver sustainable future growth."
At present about 64% of Old Mutual’s group profits come from SA and 5% from the rest of Africa, with the balance spread between offshore markets such as the UK, Europe, the US and other markets.
Compared with the past, Old Mutual has managed to narrow the gap between the profits generated in SA and offshore.
In the year ended December 1999, its first year of reporting as a London-listed company, Old Mutual posted operating profit of £656m. SA contributed £664m, the rest of Africa £34m and its rest of the world segment posted an operating loss of £42m. By 2013, Africa generated 85% of the adjusted operating profit before tax. Of this 79% came from SA, 6% from the rest of Africa, 13% from UK, Europe and international markets and 2% from other markets.
When Old Mutual strengthened its UK business, Old Mutual Wealth, last year by investing close to R10bn in acquiring private wealth manager Quilter Cheviot, the transaction seemed to underline its commitment to staying in London.
Old Mutual Group UK, a wholly owned subsidiary of the UK-based Old Mutual Plc, also listed Old Mutual Asset Management in the US and sold only a minority stake in the business.
The growing view is that should Old Mutual Wealth UK perform strongly and the share price not improve significantly, there might be a need to split the emerging markets assets from the offshore assets.
This could pave the way for separate listings in London and Johannesburg. Already Old Mutual is investing in new headquarters in the north of Johannesburg for its emerging markets business.
SA Reserve Bank research shows that when Old Mutual listed in London, it had a market capitalisation of R55,6bn on the JSE. Today its market cap is about R204bn. Though its market value has grown almost fourfold on the JSE, Old Mutual’s share performance on the JSE has underperformed that of Sanlam, which chose to stay headquartered in SA. At the end of the month in which it demutualised, November 1998, Sanlam’s share price was R5,92. At the end of July 1999, Old Mutual’s share price was at about R12,73, according to Bloomberg data.
At end-December 1999, Sanlam’s share traded at R8,50 and Old Mutual’s at R16,32. Today Old Mutual is trading at about R42 and Sanlam at R78. In other words, Old Mutual’s stock has risen by about 159% compared with Sanlam’s 819%.
Poor acquisitions offshore by Old Mutual, since disposed of, have undermined growth in shareholder value. In 2000, Old Mutual bought wealth management business Gerrard Group for £525m. In 2003 Gerrard was sold to Barclays Bank Plc for about £210m.
In September 2005 Old Mutual bought Nordic insurer Skandia. However, when outgoing CEO Julian Roberts sold Skandia in 2012, investor confidence in Old Mutual revived, as the company used proceeds from the sale to cut debt and pay better dividends. Old Mutual sold its US Life operations to Harbinger Capital in August 2010 for US$350m, having invested $600m in it.
Some believe the restructuring of Old Mutual under Roberts and the sale of a minority stake in Old Mutual Asset Management through an initial public offering have positioned the business for a better future offshore.
In the recent past, Old Mutual’s CE and finance director have been British citizens. Now that the top leadership has switched to South Africans — Hemphill and financial director Ingrid Johnson — will they favour bringing the headquarters home?