… Focused on unlocking shareholder value… Decision-making will be more decentralised
The break-up of financial services group Old Mutual plc was completed on Tuesday this week when the Africa-focused business, now known as Old Mutual Limited, was primarily listed on the Johannesburg Stock Exchange as well as secondary listings on the Zimbabwe Stock Exchange and the London Stock Exchange.
The managed separation process is expected to be materially concluded by the end of 2018, but Africa is already waiting, expectantly. Will management deliver on the promise to unlock value that was said to be trapped within the “old” group structure?
“The strategy sets out a bold new course to unlock value currently trapped within the group structure. Old Mutual has four strong businesses that can reach their full potential by freeing them from the costs and constraints of the group.
These businesses are performing strongly, have excellent competitive positions in sizeable markets and the underlying growth potential to flourish independently.”
These are the words of Bruce Hemphill, who was the chief executive of Old Mutual plc before the split. Old Mutual Limited chief executive Peter Moyo also made similar promises.
What is most exciting about our listing as an independent, standalone entity is that it enables us to unlock shareholder value and create a business with a strong strategic focus on sub-Saharan Africa.
We are privileged to have a business with a robust capital and liquidity position, which will provide the right springboard to become a leading Pan-African financial services business.
By driving long-term economic growth in Africa, we can positively impact the lives of all our customers and communities on the continent, promised Moyo.
A similar promise was also made by Old Mutual Zimbabwe Group chief executive officer and the rest of Africa CEO, Jonas Mushosho, who said the key difference between old and new Old Mutual is that the capital from shareholders would be used in its African businesses and invested in the growth opportunities present in the African markets in which it operate.
This new inward, pan-African, focus is good news for Africa and indeed for Zimbabwe, Mushosho said.
How and what value will be created?
The narrative that unbundled companies, will help unlock shareholder value, has been used since companies started splitting up. It has been said that unbundled companies often flourish because they have the freedom to be more entrepreneurial and not be part of a larger company where management may be more interested in other parts of the business or cannot make decisions quickly.
Indeed there are controls that come with being part of a bigger group, let alone one that is well diversified in terms of its operations and also in terms of geographic jurisdictions.
Speaking to management and employees of large organisations there are stories of great business ideas that suffered still birth because of painstaking and slow pace of decision making. Old Mutual too has its stories to tell. Venturing into unchartered territories on the African continent has not always received due attention and favours it deserved.
The new setup, is however, expected shorten the reporting cycle while legal checks will not be as onerous as in the past when every corporate decision had to conform with regulations from the London Headquarters.
The split will also come with a more concentrated management. The management in Zimbabwe for example, does not necessarily have to go through the headquarters in South Africa.
A de-merged business can allow management to take control of their destiny and make the decisions that best serve their needs rather than a larger plc conglomerate.
The reduced complexity should also make the operating businesses more responsive to client needs and allow them to channel resources more effectively.
In simple terms, decision-making will be more decentralised, allowing management in the different jurisdictions to seize opportunities as quickly as they can, after all it’s a terrain they fully understand in terms of its needs.
Other things to consider include, the complex nature of the old group and the resultant need to hold excess regulatory capital as well as a large central cost base in London that was perceived to add little value.
The whole organisational structure had insufficient synergies to justify those costs, and following the split, there should be regulatory and head office cost savings.
Value is also expected to be created from an investor point of view. There is a strong possibility that the true value of the business may not have been recognised by the market when part of a larger entity.
OML plc is one such company which was probably trading at a significant discount to the combined value of its underlying operations.
Given its London primary listing, offshore investors were always concerned about the large contribution of earnings from Africa, a market some did not understand, but all the same punished the share price.
Following the split and separate listings, Old Mutual Limited closed 3,16 percent higher on listing day, while the other offshoot Quilter leapt as much as 6 percent on its own JSE debut.
Add to that the distributed Nedbank shareholding and its tempting to say that the structure of the group was indeed trapping value, but its early days yet.
Africa offers vast opportunities
Insurance penetration is very low in the continent with developed economies such as Kenya having an insurance penetration of only 2,8 percent. Zimbabwe is on the low side as well although insurance sales through mobile devices has been on the increase.
Getting a foothold in Ghana and Nigeria would also bring the much needed growth — both have insurance penetration below 2 percent. Old Mutual, indeed can create more value as it has scope to gain market share, both in SA and the rest of the continent.
Are there no pitfalls?
Although the Africa focused business has the financial muscle to go it alone in its Africa adventure, its steps must still be measured lest it runs into pitfalls.
The prospects and potential that Africa has are not as bright as they were a few years ago.
The South African economy is barely growing amid stiff competition from Sanlam — hope is that management can now put more work on consolidating its position in that space.
The rest of Africa has seen its growth slow of fall amid low commodity prices and droughts. But it is moving back to trend levels of 3,5 percent in 2018. Drought is still lingering though and commodities, gold for example, are not getting favourable prices.
The high unemployment levels also suggested that not enough jobs are being created for young Africans to start taking up insurance products, a challenge that Old Mutual should help solve by investing in opportunities that create jobs.
Recently Barclays Plc gave up its 62 percent stake in its Africa business. When a leading British bank gives up a legacy and a long history of operating in Africa, it’s not a good a sign.
The exit suggest could be viewed as an indication that the story of African growth isn’t as real as many suggested.
However, Barclay’s problems could be the same reason why Old Mutual had to split, the British bank was just very slow in taking up the fresh opportunities that presented themselves. There is however no denying that its challenges were compounded by the volatility in global markets, the downturn in the commodities cycle, the slowing of China and the depreciation of many African currencies – challenges that Old Mutual will face. The new structure should however help steady the ship as Mushosho said the new entity is geared to pursue the enormous growth opportunities out there and tackle the challenges that must be overcome to create a society defined by stability and inclusive prosperity.
“We are reinvigorated and ready to take charge of our future as an independent entity firmly anchored in Africa.”