Old Mutual's Breakup Adds to South Africa Financial Market Woes

  • All four operating units to be separated by 2018, company says
  • U.K.'s Barclays also reducing South African bank holdings

Old Mutual Plc’s plan to separate its four businesses adds further uncertainty to South Africa’s financial-services industry, which is already under pressure after Barclays Plc’s decision to reduce its ownership in the country’s third-largest lender.

While Old Mutual said it will spin off its 54 percent controlling stake in Johannesburg-based Nedbank Group to shareholders, it was short on details about plans for its emerging-market business, which is run from South Africa, as well as its U.S.-based OM Asset Management business and its U.K. wealth operations. Chief Executive Officer Bruce Hemphill said it would consider an initial public offering for some assets, without elaborating further.

The main shareholders in two of South Africa’s four largest banks are scaling back at a time when investor confidence is at its lowest since apartheid ended. Africa’s most industrialized economy is confronting a potential downgrade to junk status, a weakening currency, inflation that is accelerating and interest rates at a six-year high.

“It’s not surprising people want to leave,” Mike Schussler, chief economist at Johannesburg-based research group Economists.co.za, said by phone. “There is a likelihood that you will see a lot more companies leave, in addition to the fact that many South African companies are focusing more outside the country.”

Shares in Nedbank slid 3.6 percent to 174.41 rand as of 3:04 p.m. in Johannesburg, heading for the lowest since Jan. 26. That extended losses over the past 12 months to 27 percent, the biggest decline in the seven-member FTSE/JSE Africa Banks Index, which is down 18 percent. Old Mutual dropped 1.9 percent to 181.7 pence in London. Barclays Africa has slipped 21 percent over the past year.

The management of Nedbank and Old Mutual are working with South African regulators to ensure the lender’s separation from its parent is done in a way that safeguards the stability of the country’s financial-services industry, the finance ministry said in an e-mailed statement on Friday. The National Treasury and South African Reserve Bank said on March 2 that they will collaborate with Barclays in managing the flow of money and minimize risk associated with the company’s move to lower its stake to below 20 percent from 62.3 percent.

Strategic Review

Old Mutual’s split is the culmination of a strategic review started by Chief Executive Officer Bruce Hemphill in November as he sought to reduce costs and increase value after tighter regulations crimped returns. The sale by Barclays of its African assets comes in the wake of stricter banking rules that forced the parent company to hold more capital and incur increased costs on top of a slide in the rand that hurt returns when translated into sterling. The British bank hasn’t yet said how it will sell the shares.

“The deals say a lot about the state of the global economy and companies trying to reposition themselves for a tougher global economic environment,” Garth Mackenzie, founder of Johannesburg-based TradersCorner.co.za, said.

The 171-year-old insurer’s businesses have different funding needs and lack synergies, according to Hemphill. The insurer may use proceeds from any sales to pay down debt and may consider returning capital to investors, the CEO said. Barclays Africa has maintained that its business and operations across 12 countries on the continent won’t change even as its parent divests.

Jewel in Crown

“Old Mutual wealth continues to be the fastest growing business unit and proved once again why it is the jewel in Old Mutual’s crown,” said Nico Smuts, an analyst at Johannesburg-based 36ONE Asset Management (Pty) Ltd. said by e-mail on Friday. Private-equity investors Cinven Ltd. and Warburg Pincus LLC have already made a bid for the wealth business, Sky News reported on March 5, without saying where it got the information.

The OM Asset Management business, which trades in New York, could also be spun off to investors, said Brad Preston, chief investment officer of Mergence Investment Managers (Pty) Ltd., who also said some analysts see a 20 percent “conglomerate discount” in Old Mutual stock. The company’s emerging-market business may be listed on the Johannesburg bourse, he said.

Old Mutual’s return on equity, a measure of profit, has declined since the company moved its head office to London from Johannesburg in 1999 to escape foreign exchange laws that made it difficult to pursue acquisitions outside the country. The U.K.’s Barclays first bought control of the South African lender in 2005, hoping to tap into the country’s growth rates which, a decade ago ,were much higher than those of developed nations.

“It’s incredibly important to make sure you are exposed to the correct regions that are growing with lower risk premiums,” Victor von Reiche, a money manager at Peregrine Holdings Ltd.’s BayHill Capital, said by phone from Cape Town. “In a low-growth environment where companies are struggling to report decent earnings growth in hard currencies, investors are obviously less forgiving. For that reason you’ve seen management teams actively seeking out correct regions to be exposed to.”

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