Demutualisation hopes have lost their shine in the wake of turmoil in the financial markets, writes Belinda Beresford
You could be forgiven for confusing the huff and puff over demutualisation with the sound of the gravy train pulling in for a lucky few.
Since last year, the financial world has been talking up the conversion of financial giants Old Mutual and Sanlam into ordinary, listed companies with shareholders instead of members. At times, the speculation has run rife, with predictions of a boost to the economy as a result of all the people who may decide to cash in their shares and spend the windfall. But such talk has quietened down as the turmoil in the markets makes it likely that any listing will probably raise less money than anticipated.
Sanlam’s demutualisation is under way, with a listing possible in November or December, if members approve the process. However the insurance group’s shares could be worth less than the 700c to 900c estimated at the end of July.
Meanwhile, Old Mutual continues to be coy about the details of its demutualisation, saying only that the company could list before the end of next year. Some analysts have suggested the market turmoil may push back the listing.
Old Mutual chair Mike Levett says the group is looking to list on a large stock market where shareholders would get the best price if they choose to sell. If Old Mutual did have its primary listing on the London Stock Exchange, as has been widely suggested, it could be in the top 100 companies on the stock market. It would then be included in the benchmark FTSE 100 (Footsie 100) index, adding lustre to the share, since many portfolio managers have to invest a minimum percentage of their funds in index stocks.
The greater the demand for shares, the better for the new shareholders if they chose to sell. It would also give them a rand hedge so they could benefit from future falls of the rand.
But apart from the shares or cash which policyholders of the two organisations will get if the procedures go ahead, there are less obvious benefits. Demutualisation will stimulate the economy, even if it is to a lesser extent than anticipated when the plans were first announced.
Another result is more money for development of South Africa – in the last budget Minister of Finance Trevor Manuel announced the creation of the Umsobomvu fund, to be financed with a levy on the two demutualising giants.
A sometimes forgotten aspect to demutualisation is that it could be viewed as a massive empowerment programme. For many of the thousands of people soon to become shareholders, it will be their first foray into the stock market. The education and publicity campaign being mounted by Sanlam – and no doubt Old Mutual will be equally exhaustive in its efforts to inform policyholders – is teaching people about areas of the financial world that would otherwise have remained a mystery to them.
But the big question is how many of these new shareholders will retain their shares and how many will cash them at the first opportunity. There are two major examples of demutualisation internationally: the building societies in the United Kingdom and the insurance companies in Australia. The UKexample has not always been happy, there have been fights by mutual building societies to retain their status against “carpet-baggers” who put money into building societies and then voted to change them to banks to get the windfall shares or money.
According to Old Mutual MD Garth Griffin, up to 40% of British shareholders in former mutual companies sell their shares within six months – up to 25% prefer cash from the beginning. In contrast, retention of shares by Australians was much higher – probably the result of education. South Africa is expected to follow the UK, as the less financially literate new shareholders chose to take the cash and run. The issue then would be how much of the money would be spent and how much used to pay off debts.
Whether to keep or sell your shares depends totally on your circumstances. If you’re in desperate need of money and have pressing debts, it may be a good thing to cash them in and use the money elsewhere.
A better option, however, may be to hold on. At the moment with the stock market at such low levels you’ll probably get a better price for your shares in future. Or you may decide to become a permanent player on the stock market.
Certainly, South Africans appear to be appreciating the implications of demutualisation. While Griffin says Old Mutual has not seen a rush of new policyholders as “carpet-baggers” try to benefit from the demutualisation, the company has seen individuals continuing their policies despite financial hardship, in an effort to gain the shares when the company is converted.