Johannesburg - If you'd invested R100 in Old Mutual [JSE:OML] 10 years ago it would be worth less now than the amount you put in. It's a damning indictment of a failed globalisation strategy that has cost shareholders at least R100bn in acquisitions and subsequent capital injections since its ill-fated London listing in 2000. That excludes a further bill of around R8bn in cumulative corporate costs since demutualisation.
"It's been a disaster for investors - considering the opportunity cost," says stockbroker David Shapiro. The same R100 in Sanlam would currently be worth around R270 and in mining-heavy Satrix 40 it would be R320, courtesy of the boom in resources over the past decade.
Investors who have stuck with their Old Mutual shares since demutualisation at 1 150c would have witnessed a series of peaks and deep troughs over the past 10 years. The question now is whether CEO Julian Roberts's new strategy - to be unveiled this week - will realise the value many investors believe is locked within the organisation.
Private investors (and senior staff with underwater share options) are hoping at least some of the value destruction brought about by a series of ill-considered and expensive acquisitions between 2000 and 2005 will be undone as Roberts announces the steps he'll take to restore faith in the 170-year-old London-listed South African insurance group.
On the wish list of some investors are the likely sale of US Life and the further simplification of the complex group structure, either through asset sales or business closures, while focusing on improving the group's capital position and the restoration of dividends after they were suspended at year-end 2008.
Roberts has long held the sum of the parts of the sprawling global conglomerate of insurance and investment businesses is worth considerably more than the market is reflecting in its share price. Part of his strategy is to either offload underperforming businesses or build capacity in solid operations to drive value.
Not everyone shares Roberts's enthusiasm.
"If you believe the group's embedded value (EV) per share - between 170p and 180p - is a good indicator of the value of the business, then there may be something in the value unlock argument. We don't see it that way and place very little on the EV number. Looking at this business from a long-term point of view we think there's limited upside from here," says insurance analyst Neill Young at Coronation Fund Managers.
Nesi Chetty, head of financials at RMB Asset Management, is more optimistic. "We believe Old Mutual as an investment will continue to deliver good returns, albeit at lower levels than those achieved in 2009."
Not only shareholders are hurting. Senior managers at the group's domestic business - split between Pinelands in Cape Town and head office in Johannesburg - are disgruntled with the fact that its South African operations, maligned internationally for their perceived political and currency risk, have been the cash cow for the group's failed international expansion. Privately, managers - many of whom have options issued in the high teens (ZAR) - say the firm would have been better off financially had it not listed in London. Investors and policyholders who held on to their free shares, worth 1150c at listing, would agree.
By contrast, Sanlam - which had been in the doldrums in the Nineties - began the first new decade of its demutualisation with a more humble focus on how to resolve a host of domestic challenges, among them what to do with a significant stake in Absa and an underperforming asset manager.
Sanlam CEO 'lucky'
Without detracting from the achievements of Sanlam CEO Johan van Zyl, analysts argue he was lucky to take over at a time when the firm was in serious trouble. It had conservative accounting policies and was well capitalised.
Investors are hoping Roberts will have just some of Van Zyl's luck. He also took over at a time of great uncertainty for the group. The current Old Mutual board has made no secret of the fact it regards the group's international expansion adventure as less than successful. In a recent radio interview, new chairman Patrick O'Sullivan indicated the March 11 announcement would be significant but suggested there would be no fire-sale mentality - a point regularly made by CEO Roberts since the group's capital position stabilised mid-year 2009.
"Time is of the essence. We've been talking about what we need to do for a while. Hopefully, the market will say it's a reasonable plan and will for the first time say 'they're being sensible'," O'Sullivan said on Talk Radio 702's The World at Six in January. Adding hastily: "But it isn't fair of me to malign my predecessors."
While O'Sullivan may be reticent to openly criticise his predecessors, Old Mutual's track record stands as a monument to flawed decision making. In retrospect, its helter-skelter globalisation lacked effective oversight.
Some of that may be down to the fact that then CEO and Chairman Mike Levett held both positions on the board and relinquished the latter only in 2005 when Old Mutual acquired Skandia.
It was during Levett's tenure as chairperson that its poor acquisitions were made: in 2000 it bought Gerrard Private Clients for more than R5bn and proceeded to merge several existing British businesses with it - only to sell the enlarged business in 2003 to Barclays plc for less than half of what it paid.
In the two years following Old Mutual's acquisition of United Asset Managers (UAM) in 2001 for more than R15bn, markets went into decline: the S&P 500 shed 12% in 2001 and a further 20% the next year, affecting not only profits but also its level of assets under management.
It was during this period that the group announced the acquisition of Fidelity and Guarantee Life for R4bn. In 2008 Old Mutual recapitalised it to the tune of R16bn.
In 2003, Pilgrim Baxter (which was part of UAM) was charged with market timing by the US Securities and Exchange Commission (SEC) and New York attorney-general Elliot Spitzer. Pilgrim Baxter was closed and funds were absorbed into the Old Mutual Funds group. In June 2004 the group agreed to pay a $100m settlement to US regulators after it admitted to allowing certain investors to market time its funds. That occurred to the detriment of long-term investors. The fine hit Old Mutual's profits over that period. In the midst of all that Old Mutual bought Sage Life business, which became the ill-fated US Life operation.
Expansion strategy
Between 2002 and 2005 Old Mutual - which had traded at a premium of 20% to embedded value following demutualisation - traded at a 10% discount as the promise of the US expansion strategy faded. The share again traded at a premium to embedded value in the 18 months after its Skandia acquisition. However, that rally was to prove short-lived as the consequences of its strategy in the US came back to haunt the group and the recapitalisation of struggling businesses began.
While on its acquisition spree, its South African subsidiaries were left to their own devices. While Mutual & Federal went about its daily business and Santam gained increasing traction in the short-term sector, Nedbank developed its own sense of grandeur - which led it down a destructive path of technology acquisitions, most notably a 25% stake in Dimension Data, which was ultimately aggressively written down, but only after directors sought to incentivise themselves off the back of the firm's market performance in the IT boom at the turn of the century.
There was also the failed takeover of Standard Bank and later the acquisition of BoE, just ahead of a R5bn capital-raising exercise that cost Old Mutual - as controlling shareholder - around R2,5bn to follow its rights.
Not that Old Mutual bought poor businesses offshore: in several cases it simply bought good businesses poorly. It built up a track record of buying assets at precisely the wrong time in the cycle. At the time it bought UAM it became one of the 10 biggest asset managers in the US and its acquisition of Gerrard made it the largest player in retail stockbroking in Britain.
Its US life business generated sales of $4bn a year but it failed to achieve its stated target of 12% return on equity.
The Skandia acquisition also promised good returns: again, the group failed to reach a targeted 14% return on embedded value. Skandia brought with it businesses from across the globe, with operations in Britain, Europe, Latin America, the Far East and Australia adding to its growing complexity.
Bottom line: Old Mutual is too big and complicated - it operates in 35 jurisdictions and needs focus. At one stage it owned almost 50 companies.
Roberts may choose to forego some of the focus over the short term and unveil a plan instead that will add value to struggling operations for sale later. The group's struggling US Life business is understood to be on the block. That troublesome asset lacks US scale and is sucking up cash: it received $900m in additional capital last year alone and the group has warned it might need as much as $300m more this year.
"The problem for Old Mutual has always been that it has overpaid for assets and has struggled to integrate new acquisitions. It has debt of £2bn, which is funded from SA. That has to be brought down. Its levels of debt relative to equity are just too high," says RMBAM's Nesi Chetty.
Coronation says the Skandia business is worth less than the £4bn Old Mutual paid for it - primarily because the central British business is facing severe regulatory headwinds that will see its considerable profitability dented. The so-called Retail Distribution Review currently under way in Britain will lead to tighter margins.
Investors want a greater simplification of Old Mutual's structure. Says Young: "It's not a simple business to understand, and disclosure - particularly about embedded value - doesn't make it any easier. Its track record of acquisitions hasn't been good: it has generally overpaid for assets and it remains to be seen what value can be extracted from selling them."
Foreign investment
Roberts will unveil the detail of the group's new strategy on March 11, and analysts expect the most dramatic announcement to be the disposal of the group's US life unit, while the much vaunted offloading of Nedbank is unlikely due to regulatory hurdles.
While Nedbank would make an attractive asset for foreign investors, the SA Reserve Bank will be cautious to allow another international banking group into the SA market so soon after the financial crisis. Barclays plc already controls Absa and Standard Bank has a 20% shareholder in ICBC. It also has a track record of generating enormous amounts of cash for Old Mutual to fund its offshore operations.
While its US Life business may be infinitely more saleable now than it was a year ago, it's not the only US insurer up for grabs - leading analysts such as Coronation's Young do not hold out much hope for a deal that will be significantly earnings enhancing.
Says Chetty: "Skandia could be the focus of its restructure and there's a good chance Old Mutual could list it somewhere in Europe." Other analysts suggest its US asset management business - now called Omam - might also be up for sale or even a listing of its own. However, it may be too soon to expect Roberts to make many simultaneous announcements.
Roberts has taken Old Mutual out of several of its more marginal territories since taking over at year-end 2008: businesses in Portugal, the Czech Republic, Hungary, Chile and Australia have been exited. He controversially agreed to undo predecessor Jim Sutcliffe's last acquisition and pay a R520m break fee to exit the R1,5bn offer for 49% of ABN Amro Teda. It was a courageous move by Roberts, still new in the job at the time, and sent a strong signal he was prepared to make some tough decisions. Perhaps one of the toughest decisions Roberts will take will be to do relatively little.
"He should take a 20-year view and ignore the short-term trends," says Kokkie Kooyman, head of global equities at Sanlam Investment Management. "He needs to work with what he has and turn the asset management businesses in Europe and the US into successful operations with high returns on equity."
Roberts has restored market confidence in the group's short-term viability: the big job now is to make the business sustainable amid calls from some activist investors - even senior Old Mutual managers - to bring the business back to SA. It's probably gone too far for that to happen. Roberts likes to compare Old Mutual's performance to its European peer group, illustrating his belief its future is global, albeit in a slimmed down version.
Kooyman agrees the US Life business is sub-scale and must go. As for the rest? "I think the businesses they have are fine. They don't need to sell off further units or acquire. Rather focus on what they have. It will take three to five years for shareholders to regain their confidence in Old Mutual," says Kooyman.
- Fin24.com