Johannesburg - Investors have bought into speculation that Old Mutual is planning a £9 billion (R196bn) split into stand-alone businesses and its shares surged as much as 12.4 percent before closing 6.23 percent up at R41.62 on the JSE yesterday.
The likelihood of the split comes in the wake of global regulatory hurdles and the threat of rating agencies further downgrading the company, which has already been hurt by the country’s poor credit outlook.
Read: Old Mutual shares surge
Old Mutual yesterday emphasised that all options for its future were being considered as part of the strategic review announced by chief executive Bruce Hemphill in November, but that no decision had yet been made.
The company said it would give an update with its annual results on Friday.
Exercise caution
Lender Nedbank, which is controlled by Old Mutual, slid 0.71 percent yesterday to R189.15 and warned its shareholders to exercise caution when dealing in Nedbank securities until an update on Old Mutual’s strategic review was provided on Friday.
Niko Smuts, an analyst at 36One Asset Management, said investors would welcome the split as some had been urging Old Mutual to restructure the business for some time.
“The Solvency II European insurance regulation framework, which came into effect this year, added an additional incentive for Old Mutual to simplify the group,” he said. Solvency II is an European directive that concerns the amount of capital that EU insurance companies must hold.
Old Mutual, which generates 68 percent of its earnings in rand, stands at a significant disadvantage to peers under Solvency II, analysts at Stanford C Bernstein led by Edward Houghton said in a note to investors.
“Exchange controls mean that it is not permitted to recognise surplus South African capital in its group solvency position,” they said.
Smuts said Old Mutual had been trading at a discount to the sum of its parts for several years and it was expected that allowing the underlying businesses – Old Mutual Wealth based in the UK; Old Mutual Emerging Markets based in South Africa; Old Mutual Asset Management based in the US; and Nedbank – to operate as independent businesses could unlock significant value for shareholders and free up capital.
“The Old Mutual Wealth business in particular is a prize asset, but is not fully valued by the market due to investors being unable to invest in it directly,” Smuts said.
He said a positive outcome for Nedbank would be if Old Mutual South Africa were to retain a large stake.
“If Old Mutual were to unbundle its stake in Nedbank, the share price might be under pressure for some time as those Old Mutual shareholders who do want exposure to Nedbank sell out of the shares they received during the unbundling. A decision by Old Mutual to sell some of its Nedbank shares in the market would also create a share overhang, which would be negative for the Nedbank share price.”
The rand has slumped 17 percent against the pound in the past 12 months, eroding earnings from South Africa.
While the company sold part of its US asset management business in an initial public offering, it has made few changes at its Chinese and Latin American units in the past three years.
Old Mutual was founded in South Africa in 1845 and moved its headquarters to London in 1999. On Saturday, Sky News reported that the financial services company was working on a plan to split into stand-alone businesses.
Sky said private-equity investors Cinven and Warburg Pincus had already made a multibillion-pound joint cash offer for Old Mutual Wealth.
Like other companies in South Africa, Old Mutual has been affected by the threat of the country’s potential credit downgrade to junk status.
In December, Moody’s downgraded Old Mutual from stable to a negative outlook, citing the country’s (South Africa, Baa2 negative) rating outlook to negative from stable.
The rating also reflected the weaker credit profile of the South African banking system, as well as the change in the rating outlook for Old Mutual’s subsidiary, Nedbank (Baa2, negative, for long-term deposits) to negative from stable.
Standard Bank warned last week that the current slump in the economic growth and looming downgrades by international rating agencies could harm its growth prospects in South Africa.
At the same time, Barclays announced plans to pull out of the African continent in the next three years, saying it would sell its 62.3 percent stake in Barclays Africa. Chief executive Maria Ramos said the decision was influenced mainly by global regulatory factors.
Difficult
Brad Preston, the chief investment officer at Mergence Investment Management, warned that it was going to be difficult for Old Mutual to avoid a further downgrade from Moody’s if South Africa was downgraded further.
“The most material risk to Old Mutual’s rating in the near term is the possibility that South Africa is downgraded further,” Preston said.
“If South Africa avoids a downgrade, Old Mutual Life should be able to as well. As Moody’s states the main factor that could remove this risk or lead to an upgrade could be reducing their exposure to South Africa, which this breakup would do for their UK assets.”
Preston added that Old Mutual would need to sell Nedbank or unbundle its Nedbank stake to shareholders. Given that Old Mutual had been open to selling Nedbank for a number of years and had not found a buyer, an unbundling looked more likely, he said.
* With additional reporting by Bloomberg
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