Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Old Mutual should be wary of the market cheer that greeted reports the company will break itself up.

Sinking Shares
The company's shares have fallen almost 15% over the past year
Source: Bloomberg data

Shares in the Anglo-South African insurer rallied as much as 12 percent on Monday after Sky News reported the company is considering the sale of its sizable wealth management business, a move that could help cut the conglomerate discount afflicting the stock.

The risk is that Old Mutual forgets that not only does it need to a deal -- it also needs to get a good price.

Rand's Slide
Old Mutual has been hurt by the rand's decline against the dollar
Source: Bloomberg data

It's not hard to see why CEO Bruce Hemphill, who arrived in November, would consider a break-up. Most of Old Mutual's earnings exposed to the weakening rand, and the stock is down 15 percent over the past year. Shareholders want decisive action from the new broom.

Old Mutual has already been overhauled once following the financial crisis, leaving it with four main assets -- a largely South African financial services provider, a wealth unit mostly focused on the U.K., and stakes in a fund manager and South Africa's Nedbank. There are no compelling synergies from owning all four businesses.

The company is worth 206.8 pence a share, or 10.1 billion pounds ($14 billion), on a sum-of-the-parts basis, say analysts at Bank of America Merrill Lynch. It was trading 13 percent below that level before news of the possible break-up emerged.

The shares would clearly enjoy some re-rating if the U.K. wealth business was sold, as the remaining assets would attract new investors focused purely on emerging markets.

Profit Centers
Nedbank accounted for most of Old Mutual's operating profit in the first half
Source: Company filings
Figures refer to operating profit on constant currency basis for first six months of 2015

Old Mutual's emerging markets operation is currently valued at an implied 0.65 times embedded value, the insurance standard measure of net worth. Its peer group trades at between 0.8 and 1.1 times, according to UBS research. The unit might attract interest from a bidder -- especially now that some of Barclays' African assets are up for sale.

The snag is that a break up won't help the remaining businesses perform any better. Nor would it create a gain for shareholders, unless the assets are sold off at a premium. Yet the opportunity to remove a conglomerate discount may tempt the group to accept less than the very best price for the U.K. business.

Wealth Multiple
Bernstein analysts value Old Mutual Wealth at more than £4.5 billion
Source: multiples for Old Mutual from Bernstein Research; Bloomberg data

These are prized assets: St James's Place, the industry darling, trades at almost 25 times forward earnings. Old Mutual Wealth could fetch about 20 times the same measure, according to analysts at Bernstein. That's about 4.5 billion pounds, or nearly half of Old Mutual's current market value.

If the insurer can get an auction going and achieve a decent premium, that would be a result for shareholders. But Old Mutual would be wise to keep the option of an initial public offering up its sleeve if it can't.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net