Investment guide: Old Mutual

Last year Old Mutual PLC announced that it was separating its business into four separate entities, namely: Old Mutual Emerging Markets (OMEM), Old Mutual Wealth UK (OMW), Nedbank (NED) and Old Mutual Asset Management US (OMAM).

A year after the announcement was made, Justmoney looks at how this has impacted on the company’s stock performance, and what investors can look forward to when the company is separated.

The market reaction to the MSP

Adrian Cloete, portfolio manager at PSG Wealth Cape Town/Paarl, noted that in his opinion Old Mutual’s share price should have reacted more positively to the managed separation process (MSP) announcement.

“As the current Old Mutual PLC structure wasn’t an appropriate structure that would add value to shareholders in the long term, this had been depressing the share price and the reason why Old Mutual has been trading at a discount.

“The MSP will address the constraints of PLC structure, remove the central operational costs, unlock the conglomerate discount and really focus the management of the currently unlisted subsidiaries like Old Mutual Emerging Markets (OMEM) and Old Mutual Wealth as they prepare for separate listings,” stated Cloete.

According to Cloete, the MSP should deliver the above benefits to shareholders over the next few years, with some of them starting to reflect in the share price already.  He explained that the current discount Old Mutual is trading at relative to its fair value, which implies that the market may be concerned about the executional risk in the MSP and unrealistically expect the MSP to be implemented in a shorter time frame.

“As we are dealing with a bank holding company listed in multiple jurisdictions, the regulatory process is complicated and therefore time consuming,” added Cloete.

Allan Gray highlighted that they have continued to invest in Old Mutual, as they believe that it is trading at a significant discount to the combined value of its underlying operations, which could potentially be unlocked.

According to Allan Gray, the reasons for the discounts include:

•                     The complex nature of the group and the resultant need to hold excess regulatory capital.
•                     Offshore investors’ concern about the large contribution of earnings from South Africa.
•                     Investors can invest in Nedbank directly as it is separately listed.
•                     A large central cost base in London that was perceived to add little value.

The decision to initiate the separation of Old Mutual PLC into four separate entities followed from an assessment the company carried out which looked at what would create the most long-term value, as well as put the business in a stronger position.

“The process concluded that the structure of the group was indeed trapping value and that the centre was not critical to the successful every day running of the underlying businesses,” said Allan Gray.

Furthermore, Allan Gray highlighted: “This is positive news for shareholders because the complexity and capital (conglomerate) discount should disappear; the underlying operational businesses should perform better as standalone businesses; and there should be debt and regulatory cost savings, as well as savings on head office costs. The reduced complexity should also make the operating businesses more responsive to client needs and allow them to channel resources more effectively.”

Stock performance

Over the past year (from 1 March 2016 to 17 March 2017), Cloete pointed out that the Old Mutual share price has declined by -6% in Rands, however, including the dividends of 100.32 cents per share, shareholders received a total return of -3.2%.

“In my view, as we move closer to the end of December 2018 when the MSP will be substantially complete, the market should start to price in the large positive value creation impact from the MSP, and Old Mutual’s share price should start reflecting its underlying value and not trade at such a large discount to its underlying fair value,” said Cloete.

According to Cloete, the MSP should address the constraints of the current PLC structure, and as this happens, shareholders should benefit from the value unlock. Furthermore, the MSP will see the removal of central operational costs as well as the unlocking of the conglomerate discount and the focus on the management of the currently unlisted subsidiaries like OMEM and Old Mutual Wealth as they become separate listed companies.

“When the MSP is complete current shareholders in Old Mutual PLC should receive shares in Old Mutual Wealth and the SA Topco. The SA Topco will hold 100% of OMEM as well as a controlling stake in Nedbank. As a final step the SA Topco, which continues to hold 100% of OMEM, will just retain a minority stake in Nedbank and unbundle (distribute) the majority of its stake in Nedbank to its shareholders,” explained Cloete.

The cost of the separation to Old Mutual

As with any business decision, there will be costs involved with the separation of Old Mutual PLC. Cloete highlighted that this will, however, achieve the positive outcome of unlocking value for shareholders.

According to Cloete, the breakdown of costs is as follows:

•          A £130 million (about R2032.87 million) once-off cost to achieve the £95 million (about R1485.56 million) annual recurring cost savings with regards to the removal of the PLC central operational costs.
•          At least a £100 million (about R1563.75 million) once-off transactional advisory cost will be spent to unlock the conglomerate discount.

“Unlocking the conglomerate discount could release the 10% to 20% discount that Old Mutual trades at on account of being a conglomerate with the current PLC structure,” added Cloete.

Allan Gray stated: “In our view, a good outcome for shareholders would include successfully implementing the separation at a reasonable cost, with continued growth in value from the underlying operations. OMEM would trade at a premium to its embedded value given its good returns and strong competitive positioning. OMW would be sold attracting a control premium or would be unbundled and trade in London at a valuation in line with its listed peers. Nedbank, which we believe is currently attractive in its own right, would trade in line with its historical valuation levels. OMAM would be sold and the cash used to pay down debt at the centre.”

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