IT WAS no secret that the new Old Mutual CEO, Bruce Hemphill, was going to initiate sweeping change at the unwieldy financial conglomerate. He had gone through a series of meetings with shareholders asking them about the best way to unlock value.
Old Mutual consists of at least three unrelated businesses, including a UK wealth manager (financial planning) and a US institutional asset manager (running pension funds). Neither of these businesses has much in common with the heart of the business, Old Mutual Emerging Markets, which is still dominated by the SA business.
But analysts expected Hemphill to take at least another three months to complete the strategic review. Which is why the market got excited about a weekend report from Sky News that Old Mutual was “plotting an audacious £9bn break-up”.
It speculated that Old Mutual would split into four standalone businesses: the US and the UK businesses, Old Mutual Emerging Markets, and Nedbank (which would be sold or unbundled). At the very least it would mean the closing of the Old Mutual head office in the City of London, which costs an estimated £100m to run.
The Old Mutual share price jumped by 6.5% on Monday.
SBG Securities insurance analyst Risto Ketola says the split will be a lot easier if it is true that two private equity firms, Cinven and Warburg Pincus, have lined up a cash offer for Old Mutual Wealth. Ketola says this is a quality business, as it is a vertically integrated wealth manager (it includes the adviser networks, administrative platform and asset management). It could be worth as much as £5bn, more than half of Old Mutual’s total market capitalisation. This would more than wipe out the £1.54bn of gross debt on the group balance sheet, which needs to be taken care of before the group splits up.
Wealth is expected to report full-year profit of at least £270m, and comparable wealth businesses such as St James’s Place and Rathbones trade on earnings multiples of 23-30 times. On that basis, if Hemphill does not get at least £6bn, he is better off going the listing route.
Chris Freund, co-manager of the Investec Equity Fund, says it might make sense for Old Mutual to delay the sale until it has finished its £210m technology outsourcing and back office administration project.
A quicker sale would be the US asset management unit, which is already listed and which would bring in about £700m.
The most controversial part of the plan as laid out by Sky News is the unbundling of Nedbank.
Clucas Gray portfolio manager Andrew Vintcent says it is not realistic to expect a quick exit from Nedbank.
“[Hemphill] needs to do a separation between the developed and developing market businesses first,” he says. “That is essential as we have an untenable situation in which international investors do not like the share because of its exposure to a weak rand and SA investors can’t get the level of international exposure they enjoy in the genuine rand hedges.”
Old Mutual SA and Nedbank are both well capitalised and can cope with any additional solvency requirement. And the SA Reserve Bank will not be impressed to see another shareholder of reference trying to sell down its holding so soon after Barclays aims to divest most of its holding in Barclays Africa.
Few large organisations would be willing or able to step into the breach as controlling shareholder. Inevitably, speculation has started around the Public Investment Corp. Perhaps Nedbank rather than Absa will be chosen for the putative state bank.
There would be some marginal unlocking of value from a Nedbank unbundling. It would become a large component of any free float index such as the Alsi or Swix and attract more money from passive funds. And a Nedbank share unbundled to an Old Mutual shareholder would be worth more than its component of Old Mutual’s market cap. Most analysts value Mutual’s Nedbank holding at a 20% discount.
But is this the right decision in the long term? At every presentation Old Mutual executives have emphasised the working relationship between Nedbank and Old Mutual Emerging Markets, in both the life and the short-term businesses.
After the report Nedbank issued a statement that it and Old Mutual have a longstanding commercial relationship that is a source of value underpinning their successful collaboration in SA and the rest of Africa.
But Momentum SP Reid’s Wayne McCurrie says such bancassurance arrangements have not lived up to expectations. “A large majority of people still use banks for debt and transactional facilities and go for financial advice to someone employed by or contracted to a life office.”
Sizwe Nxasana, who was then CEO of FirstRand, said when he unbundled life assurer Momentum from the group that you don’t need to a buy a cow to get milk.
Dane Schrauwen, a portfolio manager at Foord, says the possible split is not unexpected, and it will undo mistakes of the past.
“But it is being driven by short-term considerations. In the long term there will a reduction in intellectual capital and a poorer flow of ideas. The short-term shareholders have undue influence: it is not unlike Bidvest, where there will be a short-term benefit from the split between food services and the rest, but in the longer term it will be a weaker business.”
But that is a minority view. Iain Power of Truffle Asset Management says Hemphill’s mission is to close the gap between Old Mutual and its peers. One of the attractions of a standalone Old Mutual Emerging Markets without Nedbank is that it would be comparable to Sanlam: Old Mutual trades at embedded value (net worth plus the present value of the life book) while Sanlam trades on a 20% premium. Yet the performance of these operations has been very similar.