Up the creek

Roberts hunts for the pad­dle

Finweek English Edition - - Openers -

THE NEARLY 60% DROP in the price of Old Mu­tual since Jan­uary makes it the worst per­form­ing Top 40 counter on the JSE this year. Not even a 60% drop in the platinum price from its +US$2 000/oz peak has im­pacted pro­duc­ers of the metal as sig­nif­i­cantly as has the drop in con­fi­dence in South Africa’s big­gest fi­nan­cial ser­vices counter.

At its worst lev­els dur­ing Oc­to­ber, Old Mu­tual plumbed a 12-month low of 830c. Though it sub­se­quently re­cov­ered some of its losses, its re­cent price action in­di­cates some se­ri­ous con­cerns about the re­me­dial steps that might be re­quired to re­store life to the counter, once re­garded as SA’s fore­most fi­nan­cial ser­vices firm. There’s no doubt its pre-em­i­nence in SA’s fi­nan­cial sec­tor has been tainted by its in­ter­na­tional for­ays.

The rea­sons be­hind the mar­ket’s loss of con­fi­dence in Old Mu­tual are clear – how new CEO Ju­lian Roberts plans to re­store con­fi­dence in the bat­tered counter is less so.

While there have been calls for a ma­jor over­haul of the group’s now vast in­ter­na­tional busi­ness, that’s eas­ier said than done. It em­ploys more than 50 000 peo­ple and has a pres­ence on ev­ery con­ti­nent, with busi­nesses in coun­tries as di­verse as the United States, Mex­ico, Malawi, In­dia and China.

An­a­lysts would like to see a sim­pli­fi­ca­tion of the busi­ness. The big ques­tion is how?

An­a­lysts are ex­pect­ing some sort of cap­i­tal rais­ing drive when Roberts de­liv­ers his sched­uled health check on the busi­ness on 6 Novem­ber – ap­prox­i­mately two months af­ter he took over from Jim Sut­cliffe, who stepped down af­ter a se­ries of bad news events linked to Old Mu­tual’s sub-prime ex­po­sure and in­ad­e­quate prod­uct struc­tur­ing in the group’s Ber­muda busi­ness.

An un­bundling of as­sets as a means of re­turn­ing value to share­hold­ers, or sell­ing off busi­nesses in the midst of the cur­rent fi­nan­cial cri­sis, would be hardly ideal. A rights is­sue would sig­nif­i­cantly di­lute cur­rent in­vestor hold­ings in the firm. But Roberts may have lit­tle choice and in­vestors are ea­gerly an­tic­i­pat­ing guid­ance from the firm.

“I sus­pect they’ll do some­thing sig­nif­i­cant,” says port­fo­lio man­ager An­drew Vint­cent at RMB As­set Man­age­ment. “It would be ques­tion­able, though, to have rushed in dur­ing a bull mar­ket and ac­quired ex­pen­sive as­sets only to off­load them in a bear mar­ket.”

The group’s poor track record in terms of its ma­jor ac­qui­si­tions is well doc­u­mented. It did so in the US at the height of its tech boom and just over two years ago at the height of the boom in Europe did so again with its more suc­cess­ful, but pricey, Skan­dia deal. Corona­tion Fund Man­agers in­sur­ance an­a­lyst Neil Young sug­gests Roberts is un­likely to want to whit­tle down Old Mu­tual’s size. He was part of the team that de­cided on the ex­pan­sion­ary strat­egy un­der Sut­cliffe.

How­ever, in­vestors are im­pa­tient and looking for value from their in­vest­ment. Spec­u­la­tion is rife that Old Mu­tual may in­clude Ned­bank on its “For Sale” list. For many within the group and for South African reg­u­la­tors it would be seen as an en­tirely in­ap­pro­pri­ate move. Its SA busi­nesses – OMSA, Ned­bank and Mu­tual & Fed­eral – gen­er­ate about 80% of the group’s global prof­its, and div­i­dend flows from its do­mes­tic as­sets have helped fund its ex­pan­sion strat­egy. But the plum­met­ing value of the rand isn’t help­ing the con­tri­bu­tion its SA as­sets make to the over­all pic­ture. “It’s frus­trat­ing that South African share­hold­ers have had to suf­fer the con­se­quences of ex­po­sure to poor off­shore as­sets,” says Vint­cent.

In Septem­ber the group is­sued a profit warn­ing that in­cluded a R2bn write-down off the back of the col­lapse of Fred­die Mac and Fan­nie Mae’s share prices, which were vir­tu­ally wiped out by their ef­fec­tive na­tion­al­i­sa­tion by the US gov­ern­ment. Old Mu­tual was also forced to strengthen re­serves in its US life busi­ness by a fur­ther R2bn, while set­ting aside al­most R4bn more to sup­port its Ber­muda busi­ness.

There have also been con­cerns about the group’s fail­ure to sell short-term in­surer Mu­tual & Fed­eral and its even­tual de­ci­sion to re­sort to an auc­tion process that should be com­pleted by Christ­mas – but there’s no in­di­ca­tion as to what the group might achieve in terms of a sale price. The share cur­rently trades at around 1400c/share.

One for­mer di­rec­tor sug­gests the best so­lu­tion to Old Mu­tual’s cur­rent woes would be to re­turn to its home base. That would be eas­ier said than done, con­sid­er­ing the global neg­a­tiv­ity in the fi­nan­cial sec­tor. Even if it wanted to sim­plify its struc­ture by sell­ing off as­sets, it would be nigh im­pos­si­ble to get a de­cent price in the cur­rent fi­nan­cial en­vi­ron­ment.

SA’s life as­sur­ance sec­tor has seen share prices bat­tered this year by neg­a­tive mar­ket sen­ti­ment. How­ever, Lib­erty and San­lam, which are domi­ciled in SA with grow­ing, but small in­ter­na­tional ex­po­sures, are down 30% and 32% re­spec­tively.

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