SUNDAY TIMES - Dear Old Mutual -- welcome home
Sunday Times Business By HILARY JOFFE, 2017-03-19 00:00:00.0

Dear Old Mutual -- welcome home

A managed separation of Old Mutual can unlock up to $3-billion of value for the company's shareholders
Image: Gallo Images

A couple of weeks after Bruce Hemphill took over as CEO of London-listed Old Mutual in November 2015, the group held its annual off-site meeting, where management presented its three-year plans for Old Mutual's businesses.

When Hemphill aggregated the assumptions, he says, it didn't make sense.

The group was a collection of businesses with no real synergies. And it was carrying more than $200-million a year of debt and other costs at the London head office to support four healthy businesses that could look after themselves.

"I went back to my room and I thought, what do I say?" he said in an interview this week, following the recent release of Old Mutual's year-end results.

To his surprise, when he went back to the team, everyone said he was right: the group had to find some way of giving its parts back to shareholders.

The Old Mutual board had given Hemphill six months to think about a new strategy and find a better way to organise the group. But when he met his executive committee the day after the off-site, they decided they needed to figure out an answer that they could present when the group reported its year-end results in March 2016 - just three months later.

"We had to figure out how to reconfigure the way the businesses worked and get them back into the hands of our shareholders as cheaply as possible and in a way that minimised the risk," Hemphill said.

That led to Old Mutual's announcement on March 11 last year that it would implement a "managed separation", breaking itself up into its four component businesses - the SA-based emerging-markets business (Old Mutual's core), the UK wealth-management business, its listed US asset-management business (OMAM) and 53%-held Nedbank - and close its London head office.

Hemphill gave himself and his team less than three years to design and implement the incredibly complex series of deals that would be required, and get them approved by all the relevant regulators and shareholders in the various countries in which the group operates.

There's probably no precedent for the break-up of such a large financial services group, diversified across so many borders and businesses. And, with the clock ticking to get the "MS" done by the group's end-2018 deadline, Old Mutual's executives, directors and advisers are finding that it is more complicated than anyone could have imagined - and probably more costly.

The group now estimates that the exercise will incur once-off costs of more than £200-million.

Against that, however, closing the London head office will save £95-million a year in perpetuity - and the break-up of the group into its four parts is expected to release very significant value for shareholders.

A big part of the rationale for the break-up is that it is trading at a big discount to the sum of its parts - Hemphill puts this conglomerate discount at 10% to 20% of Old Mutual's market value of about £11-billion.

Analysts such as Citadel's Adrian Saville estimate the discount could be as high as 20% to 30%. Either way, the managed separation should unlock somewhere between £1-billion and £3-billion of value for Old Mutual's shareholders. It should also bring in new investors who have steered clear of the group because its mix of UK, US and South African assets made it neither a strictly emerging-markets player nor a full-on developed-market financial services group - Hemphill reports talking to big investors in London when he arrived who told him that the Old Mutual share was "uninvestable".

Two of the four components are already listed - Nedbank in South Africa and Old Mutual Asset Management in the US; the group has already started selling down its stake in the US business, from 66% to 51%, and it will ultimately unbundle much of its stake in Nedbank to shareholders.

The other two are in the process of being transformed into separate, independently listed companies by the end of 2018, with the UK wealth-management business hived off and listed in London; while the SA-based emerging-markets business, which is really at its core the original Old Mutual, will have its head office and its primary listing in Johannesburg.

The group has brought in a seasoned London financial markets executive, Glyn Jones, to chair its UK wealth-management business and he has put together a new board that will drive strategy for that business.

And it announced last week that former finance minister Trevor Manuel will chair Old Mutual Emerging Markets - which will mean he will also become chair of the new "SA Topco" that will hold Old Mutual's life assurance, asset management, insurance and lending businesses in South Africa and the rest of Africa, as well as its stake in Nedbank - and will be listed on the JSE some time next year. Manuel, who has been on the Old Mutual plc board for the past year, will be in charge of bringing in a new board and putting together a strategy for the new emerging- markets business, which will carry the Old Mutual name.

Old Mutual will, in essence, be coming home after all its years in London.

There is rich irony that it will be with Manuel at the helm - it was he who as finance minister signed off on the deal when Old Mutual moved its head office and its primary listing to London in July 1999.

The group, under Mike Levett, aspired to diversify beyond its South African and African base to become a global financial services player. It raised a big chunk of cash on the London market and, under pressure from investors to spend it, went on an acquisition spree in the UK and US. In the end, many of those investments didn't prove very successful at all.

But a restructuring in recent years has streamlined Old Mutual's businesses into good shape.

If Hemphill succeeds as promised, he could well be out of a job by 2019 - but, if he was indeed right at that off-site meeting in November 2015, Old Mutual's businesses will look very different and its shareholders will be the richer for it.