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Old Mutual’s blonde ambition

Opinions are divided as to whether Old Mutual seems to have settled for second prize in its bid for Skandia, the distressed Swedish life and funds management group.

Old Mutual has been looking to add new legs to its international business and had peered under the skirts of companies such as United Kingdom-based Britannic before eyeing Skandia, which has fallen on hard times. Recently it announced that it was offering about R37-billion, 40% of it in cash and 60% in Old Mutual shares, which Skandia reckons is a little on the light side. But the Swedes might not want to push their luck as the alternative might be a break-up of the group, according to analysts.

Should the deal go through, Old Mutual, with a market capitalisation of R65-billion, will swallow a group worth about R37-billion. The exact ratio of cash to shares may change, but the effect will be to lift Old Mutual’s market size by perhaps R20-billion. The merger would put it in fourth place in the UK market, behind Aviva, Prudential and C&G.

‘Old Mutual has never been taken particularly seriously in the city of London because of its small presence in the UK relative to South Africa, but that would change if it takes over Skandia,” says one insurance analyst.

Old Mutual’s bid for Skandia will give Old Mutual a decent-sized unit-linked life insurance business with R565-billion under management, 70% of this in the UK, and a traditional life business based in Sweden with a further R316-billion under management. Skandia has operations in about 20 countries, though these are small outside the UK and Sweden. It also has an online bank in Scandinavia.

The problem Old Mutual has in the UK is that it doesn’t get any tax deductibility for head office expenses because it generates little income there. ‘By acquiring Skandia it would then have an income base against which to offset those expenses and would effectively get a tax shield,” says Neill Young, insurance analyst at Coronation.

The geographical spread of Old Mutual’s business on an embedded value basis is 64% in South Africa, 32% in the United States and only 4% in the UK. (Embedded value is shareholder equity plus the present value of future, anticipated distributable earnings.)

Skandia’s much-hyped entry to the US funds management market in the Nineties drove its share price to record highs and then record lows in 2003 as stories of executive enrichment, dodgy accounting and risky investments started to surface. The Swedish press called it the biggest scandal in Swedish industrial history. Skandia survived after bringing in new management, and now appears to be on the mend.

Some analysts appear nonplussed by the offer for Skandia, though Young says it might work. ‘Strategically the acquisition is attractive, but we view the price being proposed as quite full. Once we know more about the potential for cost and capital synergies arising from the deal, we will be in a better position to assess this.”

The offshore jinx

Old Mutual hasn’t had an inspiring record of offshore investment since it ventured off to the London Stock Exchange in 1999 at a share price of R13. Its share price hit a peak of R20 in early 2001 and then sank to less than half this by 2003, dragged down largely by Nedbank’s poor performance. This week it traded at R16.

In May 2000 it acquired UK private client group Gerrard for R5,2-billion, followed a month later by the acquisition of Boston-based United Asset Management (UAM) for about R10-billion. It got rid of several UAM businesses and in 2001 pooled six of the remaining firms to create Old Mutual Asset Management (US), helping to lift group-wide assets under management to $209-billion (R1,35-trillion) by June this year.

Also in 2001 it acquired Unified Life Insurance, Americom Life and F&G Life to bolster its US presence. In 2003 it sold Gerrard Management Services to Barclays, and is reckoned to have made a loss of about R1,7-billion on the transaction. One of its US mutual fund companies, Pilgrim Baxter, was implicated in improper trading investigations launched by New York attorney general Eliot Spitzer, and agreed to pay $100-million (R645-million) in settlement, without admitting wrongdoing. Ironically, Skandia had its own brush with Spitzer, paying R594-million in settlement of similar charges earlier this year.

The one transaction that broke Old Mutual’s offshore jinx was F&G Life, acquired soon after Jim Sutcliffe became CEO in 2001. It has lifted the group’s US performance, though it is still lagging target returns, according to Young.

Old Mutual may have paid over the odds for many of these businesses, but the latest results show they are starting to pump profits. — Ciaran Ryan

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Ciaran Ryan
Guest Author

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