Bruce Hemphill. Picture: FINANCIAL MAIL
Bruce Hemphill. Picture: FINANCIAL MAIL

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OLD Mutual’s new CEO Bruce Hemphill is expected to announce a radical restructuring of the group when he releases its results on Friday. This could see its primary listing move from London to the JSE.

The reports of a break-up that emerged from London at the weekend come as Barclays is moving to shed its Absa subsidiary, but analysts dismissed suggestions of a general foreign disenchantment with South African financial services assets. They said the two developments were entirely different.

The main motivation for Old Mutual’s restructuring could be to eliminate the significant costs of its London headquarters and listing. The group moved to London in 1999, retaining a dual listing on the JSE.

Old Mutual tried, in 2010, to sell Nedbank to HSBC, Europe’s fifth biggest bank by assets, but the deal fell through. Analysts speculated that Nedbank was too expensive to acquire, which is why the deal was scuppered. UK lender Standard Chartered was also rumoured to have its eye on the South African bank in 2011, but this was never confirmed.

Responding to the speculation, Old Mutual said that Mr Hemphill had initiated a strategic review of the group when he joined it in November last year.

"We can confirm that all options for the strategic review are being considered, but no decision has yet been made," the company said, adding that an update would be provided on Friday when the 2015 results were announced. Because of the imminence of the announcement, the group is in a closed period.

Old Mutual operates in 30 countries and consists of the 100%-owned and SA-based Old Mutual Emerging Markets firm with operations in Africa, Latin America and India, and includes insurance company Mutual and Federal; Nedbank; UK-based asset management company Old Mutual Wealth; and New York Stock Exchange-listed Institutional Asset Management.

As at the end of the 2014 financial year, the group had assets of £9.5bn and recorded an after-tax profit of £852m.

No clarity was available on the planned restructure, but Sky News reported that Old Mutual was planning to divide itself into standalone companies including Nedbank, its UK-focused wealth unit, Old Mutual Emerging Markets and Institutional Asset Management. Private equity firms Cinven and Warburg Pincus were said to have already tabled a multibillion-pound joint cash offer for Old Mutual Wealth.

The bulk of the group’s profits come from its SA-based operations and insiders said on Sunday that bringing the primary listing of Old Mutual back to SA would save the considerable sums it spent on a London listing and the head office based there. The running costs did not justify its existence, they said. Domestic investors have long held the view that the South African companies funded the UK operation.

"Any move that helps reduce Old Mutual’s substantial overhead costs would be welcomed by investors," Momentum Wealth Portfolio Managers head Wayne McCurrie said. This could be achieved by removing the London listing of Old Mutual and locating the group’s head office in Cape Town.

Depending on the structure decided upon, unbundling the group could unlock the value of the SA-based operations, making their valuations more transparent and simplifying the firm’s corporate structure.

One analyst suggested hiving off the South African operations could tackle some of the capital ratio issues facing the group and give Old Mutual Emerging Markets the freedom and scope to become a pure emerging markets-focused business.

Brad Preston, chief investment officer: listed investments at Mergence Investment Managers, said analysts had discussed an unbundling of Old Mutual for some time and the market would generally welcome the move as a positive step as it would unlock the value of the individual businesses. He noted Old Mutual share prices traded at a discount to its rivals and would most likely be worth more if individual businesses were rated individually.

Regulations had become tougher while profit margins were declining, which was making most companies lose interest in investing in emerging-market economies such as SA, Economists.co.za chief economist Mike Schussler said. SA-specific risks affecting investment were low economic growth and rising political risk as there was "a lot of talk, but very little action" on policy, Mr Schussler said.

UK investors shied away from the share in periods of rand weakness, fearing the effect of the currency conversion on their dividends. Regulatory issues could also be a reason for the possible restructuring as most of the group’s capital sits in SA, which because of exchange control regulations might not meet the requirements of UK regulators.

Were it to unbundle Nedbank, Old Mutual would need a shareholder of reference to attain approval from the Registrar of Banks.

A shareholder of reference is a significant shareholder, although not necessarily a controlling one that has the capital muscle to rescue the bank in troubled times, such as financial difficulty or bankruptcy.

First National Bank’s shareholder of reference is Rand Merchant Bank, Standard Bank’s is ICBC and Absa’s is Barclays UK.

Nedbank, whose shareholder of reference is Old Mutual with its 54% stake, is unlikely to have another one lined up if its parent exits the business, said Asief Mohamed, director and chief investment officer of Aeon Investment Management.

"Most shareholders in Nedbank are smaller institutional investors and not major shareholders. Therefore, it is unlikely the Registrar of Banks will (approve) of the unbundling."

Malungelo Zilimbola, chief investment officer of Mazi Capital, said there was big upside potential for Old Mutual SA to create better value for its shareholders if it were separated from the offshore operations.

Mr Zilimbola said that Old Mutual was trading at a discount of about 5% to 10% of its embedded value, while the company’s smaller rival, Sanlam, was trading at a premium of about 15% to 20% of its embedded value.

"If Old Mutual had to list its local life business in SA, it would trade at a better multiple, (probably) to what Sanlam is trading at," Mr Zilimbola said.