UK Edition
Questor: as financial services group Old Mutual splits, there are opportunities aplenty
It is a long time since famous conglomerates bestrode British industry. What typically became of Bowater (diesel engines and telephone cards), Pearson (waxworks, fine wines and investment banking), Hanson (cigarettes and building aggregates) and Tomkins (bakeries and firearms) is that new management brought new focus to a seemingly random collection of assets – or impatient investors forced them to do so.
The idea of unwinding a conglomerate discount is always a popular one with shareholders who fear that individual assets suffer from depressed valuations if they are locked away within a broader entity. When is the correct time to capture that upswing in value is another matter. Old Mutual, the £10bn financial services group, is splitting itself up yet its shares have made little overall progress this year. Concerns over the outlook for the South African economy sent them lurching down at the end of March. That’s par for the course: over a five-year time frame the stock has been as rocky as South Africa’s Drakensberg mountain range.
By the end of next year, the company will become a separately-listed UK wealth manager and South African insurer, with a 54pc stake in lender Nedbank distributed to shareholders. Bruce Hemphill, the chief executive since 2015 and architect of the plan, is no fan of what went before. Old Mutual was not alone in running up losses during the financial crisis, but his purview stretches back further. Although it was founded by a Scot, John Fairbairn, 172 years ago, the company has had a British headquarters and primary listing since 1999 when a crop of South African firms felt they had outgrown the Johannesburg stock exchange. The shares have budged about 19pc in the intervening period – hardly worth the effort. When Hemphill arrived, he reasoned the assets depended little on each other and the £180m-a-year cost of the London base was a waste of investors’ money.
The City likes what it is hearing but there is much to do. There are numerous regulatory hurdles to clear and Old Mutual has still to share some specifics. The final split is likely to require a shareholder vote and it may also need a court hearing to approve a scheme of arrangement. South African regulators need to sign off on the shape of the new holding company there including the capital adequacy of its balance sheet. The Prudential Regulation Authority will have to do the same with the new UK business. Then the two listing authorities will take a view, with an expectation that the pair of spin-offs could take place next May.
There is an outside chance that a private equity buyer might swoop on some of the remaining assets, with star fund manager Richard Buxton one potential buyer. Old Mutual’s final mainland Europe wealth division, the smallish Italian unit, was offloaded last year to a firm belonging to buy-out house Cinven. Preferring to keep control of his own destiny, Hemphill is not waiting around in case someone wants to write him another cheque.
Recent half-year results were a chance to reassure. Old Mutual says it is on track with £360m of separation costs still on target. In focus at the moment is the £860m of cash sitting at head office, with further inflows expected. Analysts at Deutsche are doubtful a special dividend is likely until all capital structures have been finalised, but company watchers at UBS raise the prospect of a share buy-back programme.
Of the two operating divisions, Old Mutual Wealth is faring better. Assets under management rose 3pc to £127.3bn in the half-year and performance fees pleasantly surprised. The rival to St James’s Place is selling record levels of pension products. Just as pension freedoms are driving customers into the arms of financial advisers it is beefing up its advisory network, buying Caerus and its 300-strong team to combine with its Intrinsic platform.
Meanwhile OMEM, the South African savings and life assurer, has been hit by a decline in sales at both the entry level and to its more affluent customers but it shows signs of being able to bounce back even as unemployment remains high. UBS expects mid-single digit operating earnings growth this year followed by around 10-11pc growth thereafter.
The uncoupling of these assets may cause price fluctuations as tracker funds trade in and out. But what Hemphill and his team are trying to achieve has still to be fully reflected in the share price. Buy.