Investors loath to close Old Mutual share price gap as managed separation nears
Old Mutual insiders call it “exchange day” — the day in 2018 on which London-listed Old Mutual plc will disappear from the London Stock Exchange, to be replaced by two new listings: Old Mutual Ltd and Quilter.
Assuming all goes well with the group’s managed separation process, and in particular that regulators in many jurisdictions give it the green light, as it were, exchange day will take place soon after the group releases year end results in March.
Old Mutual Ltd, which is moving into its new building in Rivonia Road, Sandton, is the SA and emerging markets business that has Peter Moyo as CEO and Trevor Manuel as chairman.
It will have its primary listing on the JSE, with a secondary listing in London. It will initially hold the group’s 53% of Nedbank but will unbundle most of this to its shareholders later in 2018, keeping a strategic stake of just 19.9%.
Quilter is the new brand for the group’s UK wealth business, which will have its primary listing on the London Stock Exchange and a secondary listing in Johannesburg.
On exchange day, the shareholders of Old Mutual plc will be handed, instead, shares in the two new listed companies — one based in Johannesburg, and the other in London.
Although much work remains to be done and some complex problems still have to be solved between now and then, the shape and personality of the two new companies has started to emerge.
The group showcased Old Mutual Ltd to investors in a presentation in Johannesburg a few weeks ago and Old Mutual Wealth/Quilter in a presentation in London on Wednesday.
The point of the process is to put each of the companies into the hands of shareholders who really want them, as opposed to the current situation in which emerging markets investors don’t like the group because so much of its businesses are in developed markets, while UK or globally financial services investors don’t want all that South African and emerging markets stuff.
Breaking the group up is intended to unlock value for Old Mutual’s shareholders, through getting rid of the conglomerate discount, which the group estimates at up to 20%, and liberating the underlying businesses to shape up and grow. But as the breakup takes shape, analysts and fund managers are asking why the market is not trading up the share in anticipation.
The Old Mutual share is hardly higher than it was in 2016, or even four years ago. At R35.60 — the level at which it was trading on Wednesday — it is way below the R42-R44 sum that one fund manager puts on the value of the parts once the group is broken up. Some put its value higher, but none less than about R40. So why are investors not narrowing the gap?
One reason might be that the market doesn’t yet believe it’s all going to happen — not long ago, execution risk was one reason analysts were citing. But as exchange day nears, it’s surely hard to believe that managed separation isn’t happening.
Another reason is the initial overhang there will be when the new shares are unbundled to Old Mutual plc’s shareholders. Because it’s a FTSE 100 company, many of the shareholders are index trackers, which will be forced to sell the shares of Quilter, which will not be in the FT SE 100, and of Johannesburg head quartered Old Mutual Ltd.
Quilter is likely to have an initial public offering as part of its listing, mainly for that reason; Old Mutual Ltd is not, but the group is working hard to market it to emerging markets investors who will be longer-term holders. The unbundling of Nedbank suggests an overhang there too, but that is why its parent will wait for the shareholder register to “season” a bit before the unbundling takes place.
A more profound reason is that some investors would argue the value isn’t going to be unlocked just by breaking up the group. The two new listed companies will have to prove they can compete and grow, more effectively than they have done in the Old Mutual plc fold.
The locals will be watching the Johannesburg-based Old Mutual especially closely, and with some scepticism.
Old Mutual was once SA’s market leader by far but it has lost ground over the past decade or more. Insiders would concede the London-based group’s eye has been off the ball regarding the SA business. Meanwhile, other more innovative and aggressive players have pulled ahead, and, says one fund manager: “I would back Discovery or Sanlam any time against Old Mutual.” But it has much potential to be made much more efficient and integrated.
The hope is that once it has to fly on its own and be scrutinised by the market on its own merits rather than as part of a larger international group, it can up its game. Markets will be watching whether Moyo can pull it off. Likewise with Quilter, where CEO Paul Feeney must prove he can compete with the likes of listed UK wealth management market leader St James Place.