Up the creek
Roberts hunts for the paddle
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.