In-depth look at the Old Mutual split

IOL pic mar11 Old Mutual 2359 client SUPPLIED Domestic worker Constance Williams opens an Old Mutual Money Account in Claremont, Cape Town. Picture: Supplied

Johannesburg - Old Mutual plans to split into four units as Chief Executive Officer Bruce Hemphill breaks up the UK financial services company to reverse years of flagging returns.

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The insurer will spin off its controlling stake in South African lender Nedbank to shareholders and separate the US-based OM Asset Management business, its UK wealth operations and its emerging-market unit by the end of 2018, London-based Old Mutual said in a statement on Friday.

The company may consider an initial public offering of some businesses and will use proceeds from any sales to pay down debt and boost payouts to investors, the CEO said.

Strategic review

The split is the culmination of a strategic review started by Hemphill in November to boost profitability and a share price that’s trailed peers. The 171-year old company’s main South African operations are under pressure from a slumping rand and slowing economy, while the four businesses have different funding needs and lack synergies.

“Old Mutual shareholders will highly likely receive a substantial value uplift as a result of the break up,” said Richard Bottger, a money manager at Tower Capital Management in Johannesburg. “It’s interesting to see that rather than sell Nedbank they are distributing shares to shareholders. This could put further pressure on the Nedbank share price.”

Nedbank slid 2.1 percent to 177.29 rand by 10.30am in Johannesburg, heading for the lowest level since January 27. Old Mutual declined 0.3 percent to 184.7 pence in London, reversing an earlier gain of as much as 3.4 percent.

“There could be some dissatisfaction by certain shareholders who do not necessarily want to be shareholders of Nedbank,” said Ryan Cloete, an equity analyst at Cape Town-based hedge fund manager Fairtree Capital. “The actual terms of a potential sale of the UK wealth business will be key to assess, as and when they are finalised.”

Hemphill said on a conference call on Friday that he sees staff reductions at the company’s head office in London and will put himself out of a job with the split into four businesses, without giving more detail.

The insurer’s change of strategy will allow each business improved access to capital markets to fund their growth and simplify regulatory arrangements, he said.

Jewel in crown

While Old Mutual hasn’t finalised plans on how to handle the separation of all the units, other than retain a minority stake in Nedbank, it may consider IPOs for businesses that don’t yet trade their securities, the CEO said. The unbundling of Nedbank comes as Barclays seeks to cut its controlling stake in Barclays Africa Group to reduce demands on its capital.

Old Mutual also released full year results to December that showed adjusted operating earnings per share gained 8 percent on a reported currency basis to 19.3 pence, beating the 19.1 pence median estimate of 10 analysts surveyed by Bloomberg.

“Old Mutual wealth continues to be the fastest growing business unit and proved once again why it is the jewel in Old Mutual’s crown,” said Nico Smuts, an analyst at Johannesburg-based 36ONE Asset Management said by email on Friday. “Old Mutual’s African business units posted high single-digit earnings growth in constant currency, but the weak rand erased these gains for sterling investors.”

Private-equity investors Cinven and Warburg Pincus have already made a bid for the wealth business, Sky News reported on March 5, without saying where it got the information.

‘Conglomerate discount’

The OM Asset Management business, which trades in New York, could also be spun off to investors, said Brad Preston, chief investment officer of Mergence Investment Managers, who also said some analysts see a 20 percent “conglomerate discount” in Old Mutual stock.

“The main uncertainty and probably the main potential for value uplift comes from how the Old Mutual wealth business will be dealt with,” he said, adding that the emerging markets business “may come back to Johannesburg’s stock exchange”.

Old Mutual’s return on equity, a measure of profit, has declined since the company moved its head office to London from Johannesburg in 1999 to escape foreign exchange laws that made it difficult to pursue acquisitions outside the country. With the move also came increased regulation and Old Mutual must follow international solvency rules.

Old Mutual’s top two executives are South Africans. Hemphill was previously the head of wealth and insurance at Standard Bank Group, Africa’s biggest lender by assets, which last year sold a controlling stake in its UK operations after increased regulation tied up capital and caused costs to rise.

Old Mutual Finance Director Ingrid Johnson spent 20 years with Nedbank before joining the lender’s parent in 2014.

BLOOMBERG

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