Value unlocked in Old Mutual unbundling

IN NOVEMBER 2017 I wrote about Old Mutual’s planned corporate action that might unlock value for shareholders. At the time the share price was R35, moving sideways for three years. In the last four months, the share price did pick up to beyond R40, closer to its November 2015 peak of R45.

Early in 2016 Old Mutual announced its attention to re-strategise and separate its different business. Usually, a company will be broken up and listed separately, because the share price of the company in its current format does not reflect the underlying value. Under normal circumstances, the share price will start rising before the split or unbundling, as market participants begin realising the value that will soon be unlocked.

Update on separation

After two years of waiting, clear indications on the separation were provided in last week’s results, and new business targets were provided for the underlying businesses. However, there is still some uncertainty in the valuation of the individual businesses, and we expect the release of pre-listing statements could provide more clarity on the underlying operations, and may trigger the share to rerate.

The separation, which will be completed by the end of the year, will result in two new listings: a South African entity, Old Mutual Limited, and a UK entity, Quilter.

After listing, Old Mutual Limited will distribute Nedbank shares to shareholders to reduce its shareholding in the company to 19.9 percent.

In the period under review, a lot of progress was made. They sold their Indian joint venture as well as the remaining stake in the US-listed Old Mutual Asset Management. Group debt was reduced by $548 million (R6.41 billion) and intergroup debt between Quilter (Old Mutual Wealth), and the head office was settled.

The competition tribunal approved the acquisition of remaining assets and cash of the head office (currently in net cash position), by the South African entity.

Half of the remaining 130 staff at the head office are expected to leave by June, and another 40 by September. Regulatory approvals, shareholder communications and capital markets events still need to be finalised. Nedbank shares are to be distributed to shareholders within six months of listing, while the company will retain a strategic interest of 19.9 percent.

The head office, which already has sufficient cash resources to cover the remaining debt, will receive cash for the secondary offer of 9.6 percent of the interest in Quilter (Old Mutual Wealth). Should the outstanding debt be settled early, there is the potential for the excess cash to be returned to shareholders. Quilter (previously Old Mutual Wealth): Recent results show Quilter comprised 21 percent of adjusted net asset value and revenue increased by 13 percent, while assets under management and administration were up by 16 percent to £114.4bn (R1.89 trillion). Old Mutual Limited (previously Old Mutual Emerging Markets): This division comprised 41 percent of net asset value and operating profit increased 5 percent to R13.3bn. Pro-forma adjusted headline earnings on a standalone basis, which includes a 19.9 percent stake in Nedbank, increased by 25 percent to R13.4bn due to higher returns on the shareholder investment portfolio.

The life and savings new business increased by 4 percent to R2.3bn, and margins improved by 3.3 percent, driven by a more profitable business mix and pricing reviews. The embedded value increased 9 percent to R64.6bn, and the return on embedded value came in at 13.8 percent. The asset management adjusted operating profit increased 26 percent to R23.3bn, with profits of R208m (2016: R10m loss).

The short-term insurance operating profit increased by 58 percent to R282m, with a turnaround in South Africa’s underwriting margin to 3.7 percent (2016: 0.9 percent) despite the catastrophic weather events. Banking and lending profit increased 1 percent to R1.4bn, contained by a 10 percent decline in loans and advances to R23.3bn, as the group wrote off its long outstanding loan book in South Africa, which has a value of R4.9bn. Nedbank: The Nedbank stake comprised 33 percent of the adjusted net asset value.

Old Mutual looks attractively priced at current levels, and the managed separation will probably create value for shareholders.