Out with the Old

Old Mutual carve-up a question of when, not if

rOld Mutual's carve-up is a matter of when, not if. The UK-listed financials group, which confirmed on March 5 an ongoing strategic review would explore all options, has long been a weird melange - a UK wealth manager, a US asset manager, and a broader financials group in its original heartland, South Africa. The question for new boss Bruce Hemphill is whether the timing for a break-up would be as good as the idea itself.

A carve-up does make sense. If Old Mutual's South African insurance arm were listed separately in Johannesburg, it could escape European Solvency II capital rules that will make the group's capital position look worse than it is. If the US and UK parts were owned separately, they wouldn't be tainted by association with a South African economy suffering from political uncertainty and a 25 per cent fall in the rand against the US dollar in the past year. According to Bernstein analysts, South African exchange controls force Old Mutual to load corporate costs onto the US and UK businesses - which wouldn't be the case if a slimmed-down group re-domiciled to Africa.

The financials could be made to look enticing too. Old Mutual Wealth, the UK bit, is moving in the same direction as the vertically integrated St James' Place, providing investment advice as well as fund management. Imagine OMW is worth 20 times 2017 earnings, while emerging markets financials trade on RBC analysts' assumption of nine times earnings, US asset management 11.1 times and Nedbank - which is listed separately - on 8.7 times. Strip out two billion pounds of debt and other costs, and the group would be worth 11 billion pounds, around a quarter more than its market capitalisation at the close of trading on March 4.

Pulling the ripcord now may not be the smartest idea though. Not just because of South Africa's problems, but because the building out of the UK division, which could hold the biggest upside, is still in its infancy. On one hand, British pensioners no longer have to buy annuities, which could push them into the arms of asset managers. On the other, UK regulators are looking into whether vertically integrated asset managers create competition issues.

Hemphill has closed some of Old Mutual's sum-of-the-parts discount just by raising the idea of a break-up. He can afford to take his time over executing it.